The Internal Revenue Service has rolled out its annual list of the 12 most blatant tax return scams.The “Dirty Dozen” highlights a handful of new scams for the 2006 tax year that IRS auditors and criminal investigators have repeatedly encountered. Topping the list are fraudulent refunds being claimed in connection with the one-time Telephone Excise Tax Refund.

Also new to the list this year are abuses pertaining to:

  • Roth IRAs - Taxpayers should be wary of advisers who encourage them to shift under-valued property to these IRAs. In one variation, a promoter has the taxpayer move under-valued common stock into a Roth IRA, circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.
  • Disguised Corporate Ownerships - Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity. Once formed, these anonymous entities are being used to facilitate underreporting of income, non-filing of tax returns, or other illegal activities.
  • The American Indian Employment Credit - Although there is a credit available for businesses that employ Native Americans or their spouses, there is no provision for its use by employees. In this scheme, taxpayers submit returns and claims reducing taxable income by substantial amounts citing American Indian employment or treaty credit.
  • Structured Entity Credits - Promoters are setting up partnerships to own and sell state conservation easement and federal rehabilitation credits, among others. Once the credits -- the only assets owned by the partnership -- are fully used, an investor receives a K-1 indicating the initial investment is a total loss. Forming such an entity is not a viable business purpose.

Retaining their spot on the list were such schemes as zero wage, trust misuse, return preparer fraud, abuse of charitable organizations and deductions, tax abatement using Form 843, phishing and frivolous arguments.Dropping off the list, though still being monitored by the agency, were suspect credit counseling agencies, offshore transactions, employment tax evasion and the “no gain” deduction.
More details on the list are available at the IRS Web site, at www.irs.gov/newsroom/article/0,,id=167983,00.html.

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