Tax Fraud: Don't be a Victim or a Perpetrator

*With its many forms and faces, tax fraud in one of the most common crimes in the United States. Perpetrators not only rip off their victims (both individuals and the government), they also often persuade their honest victims to unwittingly engage in criminal conduct

Let's take a look at some of the more common forms of tax fraud and how you can avoid being a victim.

Return Preparer Fraud
Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may also manipulate income figures to obtain fraudulent tax credits.

In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. But that's not a defense: when the IRS detects the false return, the taxpayer must pay the additional taxes and interest, and may also be subject to penalties and criminal prosecution.

Even if someone else prepares your return, you are ultimately responsible for all the information on the tax return. While most preparers provide excellent service to their clients, the IRS urges taxpayers to be very careful when choosing a tax preparer. Make this selection as carefully as when you are choosing a doctor or a lawyer. Keep in mind that tax evasion is a felony punishable by five years imprisonment and a $250,000 fine.

Tips for choosing a return preparer:

• Avoid tax preparers who claim they can obtain larger refunds than other preparers.
• Avoid preparers who base their fee on a percentage of the amount of the refund.
• Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
• Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
• Review your return before you sign it and ask questions about entries you don't understand.
• Never sign a blank tax form. Remember, as the taxpayer, you are ultimately responsible for all of the information on your tax return.
• Ask the tax preparer for references and check them.

Other Common Scams
There are a number of other common tax scams, often perpetrated by con artists promising some type of miracle tax solution. Though the IRS code is complex and provides a plethora of ways to reduce your tax liability, there is no secret way to get out of paying taxes.

The IRS urges people to avoid these common schemes:

• Offshore transactions. Use of an offshore credit card, trust or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal.
• Phony tax payment checks. In this scheme, con artists sell fictitious financial instruments that look like checks to pay a tax liability, mortgage, and other debts. The con artists may also counsel their clients to use a phony check to overpay their taxes so they can receive a refund from the IRS for the overpayment. These false checks are worthless and it's illegal to use them to pay a tax liability or other debt.
• No taxes withheld from wages. Schemes that instruct employers not to withhold federal income tax or employment tax from wages are illegal.
• Improper home-based business. Promoters of this scheme claim that individual taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business. But the tax code firmly establishes that a clear business purpose and profit motive must exist in order to generate and claim allowable business expenses.
• Pay the tax, then get the prize. A caller says you've won a prize, and all you have to do to get it is to pay the income tax due. Don't believe it. Someone who really wins a prize may need to make an estimated tax payment to cover the taxes that will be due at the end of the year—but the payment goes to the IRS, not the caller or organization that awards the prize. Whether the prize is cash, merchandise or services, a legitimate prize giver generally sends both the winner and the IRS a Form 1099 showing the total prize value that should be reported on the winner's tax return.
• Frivolous arguments. These are false arguments against paying taxes that are not supported by law. These scams are as old as snake oil, but people continue to be taken in. They pay for the "secret" of not paying taxes and then find out that following that advice can result in civil and/or criminal penalties. Numerous sellers of the bogus schemes have been convicted on criminal tax charges.
• IRS "agent" comes to your house to collect. First, never let anyone into your home unless they first identify themselves to your satisfaction. IRS special agents, field auditors, and collection officers carry photo IDs and will normally try to contact you before they visit. If you think the person on your doorstep is an imposter, lock your door and call the local police.

These are just a sampling of common tax schemes, and clever criminals are coming up with new ones all the time. Don't allow yourself to be fooled by outrageous promises; if something sounds too good to be true, it probably is. Report any suspected fraud to your local police or the IRS. "We are firmly committed to curbing abusive tax transactions," said IRS Commissioner Mark Everson. "They are an affront to honest taxpayers and practitioners and undermine confidence in the fairness of our tax system."