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.

The Internal Revenue Service, the Department of Justice and the District of Columbia have announced the arrest and indictment of Walter Anderson, 51, a telecommunications entrepreneur. According to the indictment, Anderson obstructed the IRS and defrauded the District of Columbia by failing to pay well in excess of $200 million in taxes. Anderson was involved in starting up long-distance telecommunications businesses at a time when the industry was just being deregulated. The grand jury charged that in 1992, as Anderson realized that the merger of his first successful company -- Mid-Atlantic Telecom -- with another company would result in substantial taxable earnings, he formed an offshore corporation in the British Virgin Islands to receive and disguise his anticipated income. The company that he formed, Gold & Appel Transfer, was allegedly owned by another BVI company, with a trust company serving as registered agent and sole director. Anderson granted himself an exclusive option to purchase Gold & Appel shares for a nominal sum. Neither the option nor Anderson's name was recorded in public records, while Anderson was able to maintain complete control. Between 1992 and 1996, Anderson further obscured his ownership of Gold & Appel by using an alias and forming another offshore corporation in Panama and a mailbox drop in Amsterdam. During this period, Anderson transferred ownership in three telecommunications companies to his offshore companies so that when appreciated stock was sold, he would not appear to be the taxpayer. The indictment alleges that over a five-year period, Anderson personally earned nearly a half billion dollars through investments in business ventures that he conducted through offshore corporations. If convicted of the charges, Anderson faces up to 80 years in prison. "Average Americans deserve to feel confident that when they pay their taxes, neighbors and competitors are doing the same," said IRS Commissioner Mark W. Everson. "The IRS holds all Americans, including the most wealthy, to the same standards of honesty."

Tax shelters provided by accounting firms or external auditors potentially siphoned an aggregate $129 billion in revenue from U.S. coffers over the period from 1998 to 2003, according to a report from the Government Accountability Office. According to the GAO, some 207 Fortune 500 companies, or about 40 percent of the companies in that category, purchased tax shelters from their auditor or from CPA firms, resulting in a potential revenue loss of $56.6 billion. Meanwhile, tax shelter transactions involving the auditor for 61 Fortune 500 companies sidestepped paying about $3.4 billion in taxes between 1998 and 2003, but as a result of the shelter received $1.8 billion in federal tax benefits. The study, which calculated revenue loss from tax shelters purchased by both Fortune 500 corporations and individuals, was launched at the behest of Sen. Carl Levin, D-Mich., the ranking Democrat on the Senate Permanent Subcommittee on Investigations. The GAO noted, however, that the study included only those transactions known to the Internal Revenue Service, and said that its estimates were imprecise because some of the shelters may not be abusive and some transactions may have been counted more than once. The names of the companies and individuals purchasing tax shelters were not identified.

The Internal Revenue Service has redesigned Form 941, Employer's Quarterly Federal Tax Return. The new, simplified form is intended to help businesses, tax practitioners and payroll companies avoid common errors, and to reduce the burden associated with completing and filing the form. Form 941 is used to report wages, tips and other compensation paid, as well as Social Security, Medicare and income taxes collected. More than 23 million of these forms are filed annually by 6.6 million employers. The redesigned form features an improved layout, plain-language instructions, simplified deposit reporting and paid preparer identification. The form is also scannable, which the IRS expects will reduce transcription errors. "The new 941 is much easier on the eye and much more user-friendly," said Scott Mezistrano, senior manager of government relations for the American Payroll Association. "With the shading, bigger boxes and improved instructions right on the form, you know exactly what you are supposed to report and where to put it. The IRS did a very thorough job of reviewing every line on the 941 and considering how it could be made more clear."

Dr. David Frantz Bradford, a tax economist who proposed the "X tax," a controversial alternative to supplant the Internal Revenue Code, died at his home here. He was 66. The cause of death was burns suffered in a fire at his home earlier this month. Bradford, a professor of economics and public affairs at Princeton, as well as a professor at New York University, had advocated switching to a system that taxed people on their spending levels. His subsequent proposal, the X tax, was a distant relative to a flat tax system, but Bradford's system applied a graduated rate schedule for people in the higher income brackets. A flat tax applies a single rate of tax for all income brackets. Bradford served as deputy assistant secretary of the Treasury for tax policy in the Ford administration, and later was appointed by President George H. W. Bush to the Council of Economic Advisors from 1991 to 1993. He joined the economics department at Princeton in 1966. He also authored "Untangling the Income Tax."

The average combined sales tax rates across the nation hit a record 8.587 percent over 2004, which fueled some 764 tax rate changes, according to the 2004 Sales Tax Rate Report. The report, released by Vertex, a provider of tax technology solutions headquartered here, said that although 237 new rates were established over the course of 2004, the year also saw a record number of decreases, 160, the highest figure since 1996. Other findings included: o- Three states had state rate increases. Arkansas went from 5.125 percent to 6 percent, California went from 6 percent to 6.25 percent, and Virginia went from 3.5 percent to 4 percent. o- Mississippi, Tennessee and Rhode Island have the highest state sales tax rates, at 7 percent. The average sales tax rate is 5.318 percent. o - Wrangell, Alaska, has the highest city sales tax rate, at 7 percent. The average city sales tax rate is 1.583 percent. o- Arab, Ala., was the jurisdiction with the highest combined sales tax rate of 12 percent. The average combined rate is 8.587. The Vertex Sales Tax Rate Report provides a summary of sales tax rate changes at the state, county, city and district levels nationwide. It is available online at www.vertexinc.com.

The Internal Revenue Service issued a reminder to taxpayers and tax preparers that certain returns from Arizona, Connecticut, Utah and Virginia need to be sent to different service centers than last year. For tax year 2004, the changes affect Connecticut and Virginia returns with or without payments, and Arizona and Utah returns with payments. o Connecticut returns without payments should be sent to the IRS in Kansas City, Mo. o Connecticut returns with payments should be sent to the IRS in St. Louis. o Virginia returns without payments should be sent to the IRS in Fresno, Calif. o Arizona, Utah and Virginia payments with payments should be sent to the IRS in San Francisco. The envelopes included in the tax packages of taxpayers filing paper returns have the correct center addresses; taxpayers who do not receive a package should refer to the back cover of the Form 1040, 1040-A or 1040EZ instructions. E-filing taxpayers are unaffected by the changes.