Every year the Internal Revenue Service announces the top 12 tax scams. This tax season, topping the latest Dirty Dozen are fraudulent schemes connected with the one-time telephone excise tax refund available to most taxpayers.
The excise tax refund is available only on your 2006 federal income tax return and is intended to refund the tax collected on long distance telephone service. It's available for anyone who paid such taxes on a land line, fax, computer or cellphone for the period following Feb. 28, 2003, and before Aug. 1, 2006.
To make it easier for taxpayers, the IRS set a standard refund amount ranging from $30 to $60, based on the number of exemptions claimed on your return.
You don't need to present proof to take the standard refund amount. However, you can figure the refund using the actual amount of tax paid, based on your phone bills and other records.
Because taxpayers can request a refund for the exact amount of the taxes collected, unscrupulous tax preparers have persuaded people to claim a higher refund than they are entitled to. In some cases people are asking for thousands of dollars. Others are requesting what looks to be the entire amount of their phone bills for the period in question. In the most egregious cases, some individuals have asked for a refund of $30,000, which means they would have had a long-distance bill of $1 million from the end of February 2003 until the beginning of August last year. That 41-month period covers the time the 3 percent excise tax was collected.
To stop the abusive use of the telephone excise tax refund, the IRS is conducting site visits with tax preparers across the country to stop inflated requests. The visits started with 22 tax preparers who have handled more than 1,500 returns.
"We are taking this unusual step to confront blatant abuse of this important refund program," said IRS Commissioner Mark W. Everson. "We want tax preparers to prepare accurate tax returns. If they don't, we will move swiftly to impose civil penalties and, where warranted, seek criminal sanctions."
Everson said individuals requesting what appear to be inflated refunds will have those refunds frozen and they may be subject to an audit.
This year's Dirty Dozen list features five new scams. You can get the full list by going to IRS.gov. Here are a few that caught my attention:
· Zero Wages.In this scam, the intent is to dispute income reported on a W-2 form. A person will file a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 showing zero or little income. The IRS says the individual may include some reference that his employer refused to issue a corrected W-2 for fear of retaliation from the IRS.
· American Indian Employment Credit. This scam reminds me of a scheme in which African Americans were persuaded they were entitled to a slavery tax credit. Thousands of African Americans were duped into filing for refunds for a nonexistent "slave reparations" tax credit. Now the schemers are moving on to Native Americans, who are encouraged to submit returns claiming their taxable income should be reduced because of an American Indian employment or treaty credit. It's a lie. It might sound believable because there is an Indian Employment Credit. The intent of this credit is to give businesses an incentive to hire certain individuals who live on or near an Indian reservation. This credit is available for businesses that employ Native Americans or their spouses. In a somewhat similar scam, unscrupulous promoters have informed Native Americans that they are not subject to federal income taxation.
· Trust Misuse.This is a tried-and-true tax scam in which promoters get taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. There are more than 150 abusive trust investigations underway, and 49 injunctions have been obtained against promoters since 2001, according to the IRS. The IRS has been aggressive in cracking down on these types of illegal trusts.
In all these cases, don't try to play innocent when it comes to a fraudulent tax return. "If you sign your return, you are liable," says Edward Smith, a tax partner in the Boston accounting firm BDO Seidman.
"You should carefully go through and make sure every item that relates to your tax return is true," Smith said.
You would think this advice is obvious. But looking at the Dirty Dozen, it is clear that many people don't mind cheating.
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