Our last newsletter “A Taxing Global Future” focused on international forces afoot to separate you from your hard earned dollars, adding to your already burdensome local, state and federal tax obligations…. I’m sure this didn’t make your day.
It is true asset protection planning is generally focused on “legal” attributes such as segregating “hot” from “cool” assets, control, re-titling ownership, and integrating estate planning, to name just a few. But because there is also a “tax” side to asset protection, this element can’t be overlooked if you are interested in wealth creation and asset preservation.
However, while mitigating your tax obligations there are certainly legal limits to the tax planning you can undertake. Not coincidently, each year about this time the IRS identifies those tax schemes that are high on its radar screen you should avoid, or else.
Drum role please……….
THE IRS DIRTY DOZEN
The IRS this past week issued its 2008 annual list of the 12 most egregious tax schemes and scams it is targeting this year, known as the “Dirty Dozen.” Not surprising, included in the list are illegal misuse of trusts, hiding income offshore, disguised corporate ownerships, and a list of numerous other taxpayer schemes.
Acting IRS Commissioner stated the obvious when she said “Taxpayers should be wary of scams and promises to avoid paying taxes that seem too good to be true. There is no secret formula that can eliminate a person’s tax obligations and people should be wary of anyone peddling any of these scams.”
Yes Dorothy, tax schemes can lead to problems for both scam artists and the weary. Being forewarned is being forearmed, particularly in the land of Oz.
Here is the infamous “Dirty Dozen” line up the IRS is targeting this year:
1. Misuse of Trusts
For years, the IRS has pursued unscrupulous promoters that have urged taxpayers to transfer assets into trusts for reasons other than legitimate asset protection or estate planning purposes. They wrongfully promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.
Not all trust structures will legally deliver what is promised from a tax or legal standpoint.
2. Hiding Income Offshore
The IRS is steadfast in its belief that individuals continue to try to avoid paying U.S. taxes by illegally hiding income offshore in bank and brokerage accounts by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans.
These abuses have been on the IRS radar for at least a decade now. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. We believe the extent of the problem is over-blown by the IRS, but then again, we are not the IRS.
To the contrary, legitimate international investing and banking is a normal part of doing business offshore, and we discussed this in more detail in our newsletter “Is Going Offshore Legal?”
3. Diguised Corporate Ownership
The IRS is targeting domestic shell corporations for the purpose of disguising the ownership of a business or financial activity. Once formed, the IRS believes, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes or terrorism. The IRS is working with state authorities to identify these entities and to bring the owners into “compliance.”
Keep in mind the IRS target is “disguised” ownership, and not legitimate corporate owners. However, like anything else, make sure you aren’t caught in the cross-fire.
4. Return Preparer Fraud
The IRS is also targeting dishonest tax return preparers who can cause huge problems if you fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds.
Some of these preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits (see No.11 below) to recover taxes paid in prior years. Be sure you choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.
5. Abusive Retirement Plans
The IRS continues to seek out abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs.
You should be wary of an adviser who encourages you to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.
6. Frivolous Tax Arguments
The devil is in the details. Promoters of frivolous schemes also frequently encourage people to make unreasonable and unfounded claims to avoid paying taxes. Most recently, the IRS expanded its list of frivolous legal positions you should avoid, and be aware, there is a $5,000 penalty for filing a return or making a submission based upon a scheme posted on the list.
The list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a non-existent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below). The complete list of frivolous arguments is on the IRS Web site at www.IRS.gov.
7. Abuse of Charitable Organizations and Deductions
The IRS continues to challenge the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and over-valuation of contributed property. In addition, the IRS is targeting taxpayers trying to disguise private tuition payments as contributions to charitable or religious organizations.
And beware: the IRS relies upon “Whistleblowers” who often provide personal information to them who may be eligible for a reward. You never know which friends or lovers today can turn out to be your most zealous enemy tomorrow.
8. Zero Wages
The IRS also targets the filing of phony wage- or income-related information returns to replace a legitimate information return, which has been used as an illegal method to lower the amount of taxes owed. 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. You should resist any temptation to participate in any of the variations of this scheme.
9. Phishing
Phishing actually topped the IRS list this year. As you probably already know, phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names.
Phishing scams can take the form of an e-mail that appears to come from a legitimate source, even falsely claiming from the IRS. Over 33,000 IRS emails were forwarded to the IRS last year, reflecting more than 1,500 different IRS schemes.
Simply stated, the IRS never uses e-mail to contact taxpayers about their tax issues. If you receive unsolicited e-mail that claims to be from the IRS you can report these by forwarding them to phishing@irs.gov
10. Scams Related to the Economic Stimulus Payment
Some scam artists promise a “rebate” relating to economic stimulus payments. To obtain the payment eligible individuals generally only need to file a 2007 federal tax return. But some fraudsters posing as IRS representatives succeed at tricking taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment.
For example, a potential victim is told by phone, mail or e-mail that they are eligible for a rebate but must provide a bank account number (or similar information) to receive the payment. Be extra-vigilant as the IRS will not contact taxpayers by phone, mail or e-mail about their stimulus payment.
11. Fuel Tax Credit Scams
Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims with a penalty of $5,000.
12. False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for Abatement.” Some individuals who attempt this have not even previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request, such as "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."
So there you have it, the IRS “Dirty Dozen” for 2008. To learn more about asset protection planning and offshore living and investing read the free Past Articles posted on our site at www.DavidTanzer.com.
Until next time.
David
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com
Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272
Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328
Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999
(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &
Assoc. Member Queensland Law Society, AU - Foreign Lawyer)
(C) Copyright 2008 David Tanzer all rights reserved. The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.
How to Subscribe: Do you know someone who would be interested in the free E Newsletter? If so, please feel free to forward this message to a colleague or friend. If they like it, they can add themselves to the subscriber’s list by visiting our website at www.DavidTanzer.com by filling out the form under “Sign Up For Free E Newsletter.” It’s free!
/*end*/
|