The Dirty Dozen of tax scams.

There are two classes of tax scams: those in which taxpayers try to avoid taxes and those in which identity thieves use the tax law as a way to obtain sensitive personal information to use for illegal purposes. The IRS is identifying these scams so that taxpayers can learn to avoid them. The

Tax scams

Con artists are always trying to sell taxpayers on ways to save money on taxes--they charge for this information. The IRS has identified various tax scams for individuals and businesses. The "Dirty Dozen" of tax scams are:

1. Misuse of trusts. These trusts promise to reduce income, gift and estate taxes by having the trust pay personal expenses on a deductible basis; personal expenses are always nondeductible.

2. "Claim of Right" doctrine. This scheme instructs taxpayers to take a deduction equal to their wages and label the deduction as "a necessary expense for the production of income," which is a misinterpretation of the tax law.

3. Corporate Sole. The law allows bishops and parsons to become incorporated as a way to separate themselves from their churches, but tax scammers promote this law as a way to avoid taxes, which is illegal.

4. Offshore transactions. This scam advises taxpayers to use offset bank accounts and credit cards to keep transactions from IRS notice. Within the past year, the IRS has collected $170 million in taxes, interest and penalties from taxpayers who used this scam.

5. Employment tax evasion. Employers do not withhold income taxes or pay payroll taxes on the basis of a bogus theory.

6. Return preparer fraud. Taxpayers follow the advice of unscrupulous preparers in which the preparers obtain financial gain from the returns they prepare.

7. Americans with Disabilities Act. Scammers sell equipment and improvements to a taxpayer, promising that they can claim a credit for disability-related home improvements; the law limits a credit to only qualified businesses. The scammers collect money up front and don't even perform the services or deliver the equipment promised.

8. African-American tax refund. Scammers promise a reparations tax credit or refund, something that is not authorized by the tax law.

9. Improper home-based business. Under this scam, a bogus home based business is set up and all personal expenses are claimed as business deductions.

10. Frivolous arguments. Taxpayers pay scammers for "secret" information about how not to pay taxes. The information is false, misleading or insubstantial. Many of these promoters have been convicted of criminal offenses.

11. Identity theft. Scammers try to obtain personal and financial information under the guise of providing tax assistance.

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12. Share/borrow the earned income tax credit dependents. Scammers promise that multiple credits can be claimed for the same dependents. They "sell" dependents and split the tax benefits as a fee. Participating taxpayers could be subject to civil penalties.

There are many other tax scams. For example, the IRS has identified eight employment-tax scams (IR-2004-47, 4/5/04), including misclassifying workers as independent contractors, paying cash that is not reported and filing false payroll tax returns.

Identity theft schemes

The IRS has warned taxpayers to be alert to "phishing" by identity thieves who try to induce the uninformed to provide their Social Security numbers. Identity thieves use the number to obtain credit cards and run up thousands of dollars in purchases. The taxpayer whose Social Security number is used must work with credit card companies, credit reporting bureaus and other agencies to correct the problem.

The latest phishing scam is targeting nonresident aliens with U.S. source income (IR-2004-104, 8/3/04). Identity thieves are sending out bogus IRS Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding." The form asks for personal and financial information. It has appeared lately primarily in Caribbean countries, including Barbados, Puerto Rico, Trinidad, Tobago and the Turks and Caicos Islands: earlier this year it was in South America and Europe. Beware of the bogus form: The IRS has no such form and never asks for personal and financial information via a tax form.

To stay up on the latest scam alerts, go to www.irs.gov./newsroom/article/0,,id=98269.00.html.

Mr. Kess is the author of 25 books on tax related topics. He is probably best known for lecturing to more than 45 State societies and more than 700,000 practitioners on tax and estate planning issues. In 2003 he received special recognition from the AICPA and CCH for his many contributions to the tax profession. He created and moderates the annual AICPA Conference on Tax Strategies for the High-Income Individual. He is a graduate of Harvard Law School and received his L.L.M. from New York University.