IRS Releases Dirty Dozen Tax Scams
The Internal Revenue Service has released its 2009 “dirty dozen” list of tax scams, including schemes involving disguised corporate ownership, phony wages, and abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements.
According to the IRS, some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity, and those entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, money laundering, financial crimes, etc. The IRS says it is working with state authorities to identify these entities and to bring the owners of these entities into compliance. “Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed,” IRS says. “Typically, a Form 4852 (Substitute Form W-2) or a ‘corrected’ Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme,” IRS says.
The IRS also looks for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited.