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Beware Tax Scams : 2005

WASHINGTON — The IRS today unveiled its annual listing of notorious tax scams, reminding taxpayers to Beware of schemes that promise to eliminate taxes, lower the taxes or otherwise sound too good to be true.

They reminde that tax scams can take many forms,” IRS Commissioner Mark W. Everson said. "Don’t be fooled by false promises peddled by scam artists. They’ll take your money and leave you with a hefty tax bill.

The IRS routinely pursues and shuts down promoters of these scams. But taxpayers should also remember that anyone pulled into these schemes can face repayment of taxes plus interest and penalties (imprisonment).

Persons who suspect tax fraud can call the IRS at 1-800-829-0433.

The IRS urges people to avoid these common schemes:

  1. Trust Misuse. Some trusts do not deliver the promised tax benefits, and the IRS is actively examining these arrangements. More than 24 injunctions have been obtained against promoters since 2001, and numerous promoters and their clients have been prosecuted.

  2. Frivolous Arguments . Promoters claims that the 16th Amendment concerning congressional power to lay 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 5th Amendment right against self-incrimination or the 4th Amendment right to privacy. Don’t believe these. Taxpayers have the right to contest their tax liabilities in court.

  3. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their plan. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

  4. "Claim of Right" Doctrine. Taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter advises the taxpayer to label the deduction as "a necessary expense for the production of income” or "compensation for personal services actually rendered.” This so-called deduction is based on a misinterpretation of the Internal Revenue Code and has no basis in law.

  5. "No Gain" Deduction. Similar to "Claim of Right,” agents attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled "Other Miscellaneous Deductions” and attaches a statement to the return, referring to court documents and including the words "No Gain Realized.”

  6. Abuse of Charitable Organizations and Deductions. The IRS has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A "contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.

  7. Corporation Sole. Since 9/2004, the Department of Justice has obtained 6 injunctions against promoters of this scheme and filed complaints against 11 others. Participants apply for incorporation under the pretext of being a "bishop” or "overseer” of a one-person, phony religious organization or society with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit, religious organization. When used as intended, Corporation Sole statutes enable religious leaders to separate themselves legally from the control and ownership of church assets. But the rules have been twisted at seminars where taxpayers are charged fees of $1,000 or more and incorrectly told that Corporation Sole laws provide a "legal” way to escape paying federal income taxes, child support and other personal debts.

  8. Offshore Transactions. Despite a crackdown on the practice by the IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so. The IRS, along with the tax agencies of U.S. states and possessions, continues to aggressively pursue taxpayers and promoters involved in such abusive transactions.

  9. Identity Theft. It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. If taxpayers have any doubt whether a contact from the IRS is authentic, they can call 1-800-829-1040 to confirm it.

  10. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write "nunc pro tunc”–– Latin for "now for then”––on the return.

  11. Employment Tax Evasion. There is a number of illegal schemes that instruct employers not to with hold federal income tax or other employment taxes from wages paid to their employees. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

Other Scams Still Lingering

The IRS removed 4 scams this year: slavery reparations, improper home-based businesses, the Americans with Disabilities Act and EITC dependent sharing. Taxpayers should remain wary because the IRS has seen old scams resurface or evolve.

New tax scams or schemes routinely pop up, especially around tax time.

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