What Are Some of the Most Common Abusive Tax Schemes?
There are a few schemes outlined below. These are included as a warning, not a suggestion!
Don’t think about trying these because the IRS is well aware of them and the probability of getting caught is high.
Tax evasion using foreign jurisdictions is accomplished using many different methods. Some can be as simple as taking unreported cash receipts and personally traveling to a tax haven country and depositing the cash into a bank account.
Others are more elaborate involving numerous domestic and foreign trusts, partnerships, nominees, etc. The following schemes are not all-inclusive, but just a sample of abusive tax schemes.
Abusive Foreign Trust Schemes:
The foreign trust schemes usually start off as a series of domestic trusts layered upon one another. This set up is used to give the appearance that the taxpayer has turned his/her business and assets over to a trust and is no longer in control of the business or its assets. Once transferred to the domestic trust, the income and expenses are passed to one or more foreign trusts, typically in tax haven countries.
As an example, a taxpayer’s business is split into two trusts. One trust would be the business trust that is in charge of the daily operations. The other trust is an equipment trust formed to hold the business’s equipment that is leased back to the business trust at inflated rates to nullify any income reported on the business trust tax return (Form 1041).
Next the income from the equipment trust is distributed to foreign trust-one, again, which nullifies any tax due on the equipment trust tax return. Foreign trust-one then distributes all or most of its income to foreign trust-two.
Since all of foreign trust-two’s income is foreign based there is no filing requirement.
Once the assets are in foreign trust-two, a bank account is opened either under the trust name or an International Business Corporation (IBC). The trust documentation and business records of this scheme all make it appear that the taxpayer is no longer in control of his/her business or its assets.
However, the reality is that nothing ever changed. The taxpayer still exercises full control over his/her business and assets. There can be many different variations to the scheme.
International Business Corporations (IBC):
The taxpayer establishes an IBC with the exact name as that of his/her business. The IBC also has a bank account in the foreign country. As the taxpayer receives checks from customers, he sends them to the bank in the foreign country.
The foreign bank then uses its correspondent account to process the checks so that it never would appear to the customer, upon reviewing the canceled check that the payment was sent offshore. Once the checks clear, the taxpayer’s IBC account is credited for the check payments.
Here the taxpayer has, again, transferred the unreported income offshore to a tax haven jurisdiction.
False Billing Schemes:
A taxpayer sets up an International Business Corporation (IBC) in a tax haven country with a nominee as the owner (usually the promoter). A bank account is then opened under the IBC.
On the bank’s records the taxpayer would be listed as a signatory on the account. The promoter then issues invoices to the taxpayer’s business for goods allegedly purchased by the taxpayer. The taxpayer then sends payment to the IBC that gets deposited into the joint account held by the IBC and taxpayer.
The taxpayer takes a business deduction for the payment to the IBC thereby reducing his/her taxable income and has safely placed the unreported income into the foreign bank account.
Watch Out For Tax Scams!
Filed Under Tax News, Tax Returns, Tax Scams | Leave a Comment
www.taxassistonline.com keeping you up to date with tax news and tips.
In TAX TIP 2006-24 the IRS Warns Taxpayers To Beware of Tax Scams
Tax scams can take several forms, ranging from the promise of a large tax refund to the promotion of illegal ways of taxing yourself.
- Believe me, a few extra dollars is absolutely not worth the pain of the IRS chasing after you for years on end!
Here are some of the common schemes you should beware of:
Return Preparer Fraud:
Dishonest tax return preparers can cause many headaches for taxpayers who fall victim to their schemes.
Basically these preparers get their financial gain by skimming a portion of your refunds and by charging you inflated fees for return preparation services.
They will try to attract you by promising large refunds which may be dubious.
Remember: No matter who prepares your tax return you are ultimately responsible for its accuracy and for any tax bill that may arise due to a questionable claim.
So choose carefully when you hire a tax preparer, because if what they are offereing sounds too good to be true, it probably is.
Identity Theft:
Take care when disclosing your personal information. The IRS is aware of several identity theft scams involving taxes or scammers posing as the IRS itself.
Identity thieves have posed as IRS employees and then used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans.
The IRS does not use e-mail to contact taxpayers about issues related to their accounts. If you have any doubt whether a contact from the IRS is authentic call 1-800-829-1040 to confirm it.
Frivolous Arguments:
Promoters of dubious tax schemes have been known to make various outlandish claims such as:
- the Sixteenth Amendment concerning congressional power to establish and collect income taxes was never ratified;
- that wages are not income;
- that filing a return and paying taxes are merely voluntary;
- and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.
These are all mad and bad, so don’t believe these or other similar claims. The arguments are false and have already been thrown out of court.
As a taxpayers you have the right to contest your tax liabilities in court but no one has the right to disobey the law and if you do - deliberately or otherwise - it will cost you dollars and pain.
Three important lessons to remember:
1. You are responsible and liable for the content of your tax return.
2. Anyone who promises you a bigger refund without knowing your tax situation could be misleading you, and
3. Never sign a tax return without looking it over to make sure it is accurate.
Click here for more information about tax scams and other useful tax tips from the IRS.
RSS Feed
-
- Clean Fuel Vehicle Credit
- EITC
- HMRC (IRD) News
- Identity Theft
- IRS News
- IRS Tax Forms
- State Tax Forms
- Tax Abuse & Avoidance
- Tax Agents
- Tax Deductions
- Tax Forms
- Tax Help & Assistance
- Tax News
- Tax Refunds
- Tax Returns
- Tax Rules
- Tax Scams
- Tax Software
- Taxpayer Rights
- Telephone Excise Tax Refund
- Turbo Tax
- Uncategorized