IRS Announces the 2005 "Dirty Dozen"

The Internal Revenue Service has unveiled its annual listing of notorious tax scams, the "Dirty Dozen," reminding taxpayers to be wary of schemes that promise to eliminate taxes or otherwise sound too good to be true. The Dirty Dozen for 2005 includes several new scams that either manipulate laws governing charitable groups, abuse credit counseling services or rely on refuted arguments to claim tax exemptions. The agency also sees the continuing spread of identity theft schemes preying on people through e-mail, the Internet or the phone, sometimes with con artists posing as IRS representatives. The IRS removed four scams from the Dirty Dozen this year: slavery reparations, improper home-based businesses, the Americans with Disabilities Act and EITC dependent sharing. But the IRS cautions that taxpayers should remain wary because old scams can resurface or evolve. The IRS urges people to avoid these common schemes: 1. Trust misuse. Unscrupulous promoters urge taxpayers to transfer assets into trusts, promising reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. 2. Frivolous arguments. Myriad outlandish claims are made, including that the Sixteenth Amendment was never ratified, that wages are not income, and that filing a return is voluntary. 3. Return preparer fraud. Dishonest preparers derive financial gain by skimming a portion of clients' refunds and charging inflated fees for services. 4. Credit counseling agencies. Some of these tax-exempt organizations, which are intended to provide education to low-income customers with debt problems, are charging large fees while providing little or no counseling. 5. "Claim of Right" doctrine. The taxpayer attempts to take a deduction equal to the entire amount of wages, labeling it as a necessary expense for the production of income. 6. "No Gain" deduction. Similar to Claim of Right, filers eliminate their entire adjusted gross income by deducting it on Schedule A. 7. Corporation sole. Participants incorporate under the pretext of being a bishop or overseer of a one-person, phony religious organization, with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit religious organization. 8. Identity theft. Fraudsters send bank customers fictitious correspondence and IRS forms to trick them into disclosing their personal financial data, or use Social Security numbers to file false returns without the clients' knowledge. 9. Abuse of charitable organizations and deductions. A taxpayer moves assets to a tax-exempt organization, but maintains control over the assets, thereby obtaining a deduction without transferring a commensurate benefit to charity. 10. Offshore transactions. Income is illegally hidden in offshore accounts. 11. Zero return. Taxpayers enter all zeros on their return. 12. Employment tax evasion. Failure to withhold income tax or other employment taxes based on an incorrect interpretation of Code Section 861.