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The Internal Revenue Service has reminded taxpayers about the agency’s “Dirty Dozen”––its latest annual tally of some of the most notorious tax scams––along with an alert to taxpayers this filing season to watch out for schemes that promise to reduce or eliminate taxes.

Two new schemes have worked their way onto the list in 2006. In recent months IRS personnel have noted the emergence of the two scams––“zero wages” and “Form 843 tax abatement”–– in which filers use IRS forms to claim that their tax bills have been wrongly inflated.

Also high on the list in 2006 is “phishing,” a favorite ploy of identity thieves. Over the past few years, the IRS has observed criminals working through the Internet, posing even as representatives of the IRS itself, with the goal of tricking unsuspecting taxpayers into revealing private information that can be used to steal from their financial accounts.

Several of the usual suspects from last year remain on the list. The IRS, for example, continues to see schemes designed to exploit charitable organizations. Some taxpayers, meanwhile, still use frivolous arguments to claim they do not owe taxes, despite the fact such reasoning has been thrown out of court time and again.

“When it comes to taxes, everyone has to pay their fair share,” IRS Commissioner Mark W. Everson said. “I urge taxpayers not to be taken in by hucksters who promise to lower or eliminate taxes. Getting caught up in the Dirty Dozen or similar schemes can lead to big headaches.

”Namely, involvement with tax schemes can lead to imprisonment and fines. The IRS pursues and shuts down promoters of these and numerous other scams. Anyone pulled into these schemes can also face repayment of taxes plus interest and penalties.

The IRS urges people to avoid these common schemes:

1. Zero Wages. In this scam, new to the Dirty Dozen, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows zero or little wages or other income. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer.An explanation on the Form 4852 may cite “statutory language behind IRC 3401 and 3121″ or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a “Zero Return.” (See number four below.)

2. Form 843 Tax Abatement. This scam, also new to the Dirty Dozen, rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: “Failed to properly compute and/or calculate IRC Sec 83––Property Transferred in Connection with Performance of Service.”

3. Phishing. Phishing is a technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. These Internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. Sometimes scammers pose as the IRS itself. In recent months, some taxpayers have received e-mails that appear to come from the IRS. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web site. The Web site then solicits a social security and credit card number. In a variation of this scheme, criminals have used e-mail to announce to unsuspecting taxpayers they are “under audit” and could make things right by divulging selected private financial information. Taxpayers should take note: The IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts. If a taxpayer has any doubt whether a contact from the IRS is authentic, the taxpayer should call 1-800-829-1040 to confirm it.

4. 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. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

5. Trust Misuse. For years unscrupulous promoters have urged 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, and the IRS is actively examining these arrangements. There are currently more than 200 active investigations underway and three dozen injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

6. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

7. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, “If it sounds too good to be true, it probably is.” And remember, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. 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. During fiscal year 2005, more than 110 tax return preparers were convicted of tax crimes.

8. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

9. Abuse of Charitable Organizations and Deductions. The IRS has observed increased 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.

10. Offshore Transactions. Despite a crackdown 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 and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. During fiscal 2005, 68 individuals were convicted on charges of promotion and use of abusive tax schemes designed to evade taxes.

11. Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Lately, the IRS has seen an increase in activity in the area of “double-dip” parking and medical reimbursement issues. In recent years, the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. During fiscal 2005, more than 50 individuals were sentenced to an average of 30 months in prison for employment tax evasion. 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.

12. “No Gain” Deduction. Filers 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 that refers to court documents and includes the words “No Gain Realized.”

Posted under Finance, Privacy

The Internal Revenue Service has awarded contracts to three firms to participate in the first phase of its private debt collection initiative.

The firms are:

The CBE Group Inc., Waterloo, Iowa.
Linebarger Goggan Blair & Sampson, LLP, Austin, Texas.
Pioneer Credit Recovery, Inc., Arcade, N.Y.

A total of 33 firms took part in the competitive bidding process that resulted in today’s contract awards.

“The vast majority of states use private firms to help collect delinquent taxes. The new authority that Congress gave to the federal government allows us to use private firms as well,” said IRS Commissioner Mark W. Everson. “We have carefully considered all of the concerns expressed about this project, which involves work traditionally done by the government. As a result, we are putting tough safeguards in place to protect taxpayer rights and privacy. We will be closely monitoring contractor performance to make sure they’re following the law as well as our own internal standards.”

To assist the IRS in its collection of back taxes, the 2004 American Jobs Creation Act authorizes the IRS to hire private firms to collect federal tax debts. This particular portion of the law was carefully crafted and includes several limitations to ensure the private firms will be subject to the same stringent taxpayer protection and privacy rules that IRS employees work under. In addition, private firms cannot subcontract the work. The IRS expects to assign uncollected liabilities to the firms beginning this summer.

The IRS has also developed its own guidelines for the private firms, including background checks on all private firm personnel associated with the project as well as a mandatory, IRS-directed training program for company personnel.

Private firms will not be authorized to take enforcement actions such as liens, levies or seizures. In addition, private firms will not be authorized to work on technical issues such as offers in compromise, bankruptcies, hardship issues or litigation. Rather, the IRS will assign to the private firms cases in which the taxpayer has not disputed the liability. The private firms will contact taxpayers to make payment arrangements.“Redirecting relatively simple cases to private firms will permit the IRS to focus its existing collection and enforcement personnel on more complex tax issues,” Everson said.

In the second phase of the private debt collection project, scheduled for 2008, the IRS intends to contract with up to 10 firms. Over the course of 10 years, the IRS expects the private firms to help it collect an additional $1.4 billion in outstanding taxes.

Posted under Finance

In a February 24 speech at the City Club of Cleveland, IRS Commissioner Mark Everson criticized charities that became involved in politics. The appropriate excerpts from his speech:

Nearly three-quarters of the 82 examinations completed to date have substantiated that the charities or churches engaged in prohibited political activity. Most of these exams concerned one-time, isolated occurrences of prohibited campaign activity, which the IRS addressed through written advisories to the organizations. In three cases — involving charities but not churches — the prohibited activity was egregious enough to warrant the IRS proposing the revocation of the organizations’ tax-exempt status.

Some of the specific instances of political intervention alleged and examined include the following:

• • Charities, including churches, distributing diverse printed materials that encouraged their members to vote for a particular candidate (24 alleged; 9 determined),
• Religious leaders using the pulpit to endorse or oppose a particular candidate (19 alleged; 12 determined),
• Charities, including churches, endorsing or opposing a candidate on their website or through links to another website (15 alleged; 7 determined),
• Charities, including churches, disseminating improper voter guides or candidate ratings that encourage readers to vote for particular candidates (14 alleged; 4 determined),
• Charities, including churches, placing signs on their property that show they support a particular candidate (12 alleged; 9 determined),
• Charities, including churches, giving improperly preferential treatment to certain candidates by permitting them to speak at functions (11 alleged; 9 determined), and
• Charities, including churches, making cash contributions to a candidate’s political campaign (7 alleged; 5 determined).

So what are we going to do next? As we head into the 2006 campaign season, the IRS will:
Distribute expanded educational materials based on findings in the 2004 cycle, making them widely available early in the coming election cycle,

1. Start our enforcement efforts earlier in the election year to ensure consistent and timely referral selections and examinations,
2. Publicize our efforts in advance so there is no surprise to organizations, and
3. Augment the dedicated and trained team working on political intervention to assure prompt handling of project cases.

Posted under Customer Service

Unclaimed refunds totaling more than $2 billion are awaiting about 1.7 million people who failed to file a federal income tax return for 2002, the Internal Revenue Service announced last week. However, in order to collect the money, a return for 2002 must be filed with an IRS office no later than April 17, 2006.

The IRS estimates that half of those who could claim refunds would receive more than $570. In some cases, individuals had taxes withheld from their wages, or made payments against their taxes out of self-employed earnings, but had too little income to require filing a tax return. Some taxpayers may also be eligible for the refundable Earned Income Tax Credit.

“We want people to get the refunds they’re entitled to,” said IRS Commissioner Mark W. Everson. “We urge taxpayers to double-check their records before the April 17th deadline. Taxpayers can’t get a refund if they don’t file a tax return.”

In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury. For 2002 returns, the window closes on April 17, 2006. The law requires that the return be properly addressed, postmarked and mailed by that date. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2002 refund that their checks will be held if they have not filed tax returns for 2003 or 2004. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2002. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Although eligible taxpayers may get a refund when their EITC is more than what they owe in tax, those who file returns more than three years late would be able only to apply it toward the taxes they owe (if any). They would not be able to receive a refund if the credit exceeded their tax.

Generally, individuals qualified for the EITC if in 2002 they earned less than $33,178 and had more than one qualifying child living with them, earned less than $29,201 with one qualifying child, or earned less than $11,060 and had no qualifying child.

Posted under Finance

National Taxpayer Advocate Nina E. Olson today released a report to Congress that urges Congress to enact fundamental tax simplification.

“Our tax code has grown so complex that it creates opportunities for taxpayers to make inadvertent mistakes as well as to game the system,” Olson writes. “As taxpayers become confused and make mistakes, or deliberately ‘push the envelope,’ the IRS understandably responds with increased enforcement actions. The exploitation of ‘loopholes’ leads to calls for new legislation to crack down on abuses, which in turn makes the tax law more complex. Thus begins an endless cycle – complexity drives inadvertent error and fraud, which drive increased enforcement or new legislation, which drives additional complexity. In short, complexity begets more complexity. This cycle can only be broken by true tax simplification, followed by ongoing legislative and administrative discipline to avoid ‘complexity creep.’”

Olson states that the tax code should be revised to incorporate six core principles:

It should not “entrap” taxpayers.
It should be simple enough so that taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers’ questions.
It should be written in a way that anticipates the largest areas of noncompliance and minimizes the opportunities for such noncompliance.
It should provide some choices, but not too many choices.
It should not necessarily avoid refundable credits but, if it includes them, it should design them in a way that is administrable.
It should require a periodic review of its provisions – in short, a sanity check.

The report also makes legislative recommendations to reduce noncompliance in the “cash economy”; to simplify the Code’s family-status provisions; to revamp the rules governing joint-and-several liability on joint returns as well as community property in the collection of tax; to require brokers to track and report cost basis for stocks and mutual funds to both investors and the IRS; to lessen the burdens of tracking the cost basis of stocks and mutual funds if the current-law step-up in basis on death is eliminated as scheduled in 2010; and to restructure and reform the Code’s collection due process (CDP) provisions.

By statute, the National Taxpayer Advocate is required to identify at least 20 of the most serious problems encountered by taxpayers. In this year’s report, Olson identifies trends in taxpayer service as the #1 most serious problem. While expressing support for a strong IRS enforcement presence, Olson expresses concern that the IRS is expanding enforcement at the expense of taxpayer service. The report states that the IRS has eliminated TeleFile, significantly reduced the number of returns IRS personnel prepare for taxpayers who seek IRS assistance, reduced the percentage of taxpayer calls IRS telephone assisters answer as compared with FY 2004, and substantially reduced its taxpayer education function for small businesses.

“Significantly, these actions are taking place without any empirical evidence that the reductions will not harm taxpayers and not result in decreased compliance,” Olson writes. “Although the IRS maintains that it is difficult to measure the impact of high quality taxpayer service on compliance, the National Taxpayer Advocate finds that position unpersuasive. Too much is at stake not to conduct the appropriate research and develop cutting-edge strategies that will provide world-class taxpayer service.” The report makes recommendations about how to approach and conduct such research.

The report cites Criminal Investigation (CI) refund freezes as the #2 most serious problem facing taxpayers. The report states that CI places “freezes” on hundreds of thousands of refunds each year due to a suspicion of fraud and then makes a “determination” whether the returns are, in fact, fraudulent without notifying taxpayers that their refund claims are under review or giving them an opportunity to present evidence supporting their positions.

In FY 2004, more than 28,000 taxpayers whose refunds had been frozen sought assistance from the Taxpayer Advocate Service (TAS). The TAS research function studied a statistically representative sample of these cases and found that, with TAS assistance, taxpayers ultimately received the full amount of the refund they had claimed in 66 percent of the frozen-refund cases and a portion of the refund they had claimed in an additional 14 percent of the cases. Olson urges the IRS to implement procedures to notify taxpayers promptly that their refunds have been frozen, provide taxpayers with an opportunity to submit supporting documentation, and bring cases to a quicker resolution. The TAS research study is published as Volume II of the report.

Among other problems the report identifies are the need for IRS to develop a comprehensive strategy to address noncompliance in the “cash economy,” the adequacy of training for private debt collection employees as the IRS rolls out its Private Debt Collection (PDC) initiative in 2006, and delays and related problems in examining returns that claim the earned income tax credit (EITC).

Posted under Finance

Forget what Kelley Blue Book says. Forget how much you paid or whether you’ve just overhauled the engine. If you donate a car to charity, the U.S. Internal Revenue Service (IRS) wants to remind you that you can only claim a $500 deduction.

The only exception to this rule is if the charity sells the car for more than $500. In tax-speak, that translates to deductions are “limited to the gross proceeds from the sale of the vehicle by the charity. The charity must provide a written acknowledgment within 30 days after the vehicle is sold that notifies the taxpayer of the amount of the gross sales proceeds.”

That is the big news the agency reminded taxpayers of on December 22 as the year wrapped up, and taxpayers began opening their new copies of TurboTax. The IRS also cautioned that all deductions require a “charity’s written acknowledgment”. In the real world, we call those receipts.

So that 1984 Nissan Stanza in the shed behind the garage? You can deduct what the charity sells the car for (yes, they’re required to let you know). As with any tax issue, there are some exceptions, notably here if the vehicle is sold for less for charitable purposes, so always check with your tax preparer or the IRS itself before basing your return on blog entries and other information you’ve stumbled upon in the media or on the web.

Posted under Automotive, Finance

The Internal Revenue Service has announced plans to reduce the agency’s budget by cutting phone service for consumers seeking tax help. The agency said it would eliminate three customer service hours each day from its service and save approximately $10 million annually.

President Colleen M. Kelley of the National Treasury Employees Union (NTEU) called the move “an absolute outrage” and said that her organization was notified the change would be made January 23, 2006, a period she called the height of taxpayer help season.

The IRS had previously sought to save money by reducing the number of customer service centers it operates, but abandoned that plan earlier this year after consumer advocates and other interested parties protested.

Posted under Customer Service, Finance

Personal exemptions and standard deductions will rise, tax brackets will widen and individuals will be able to make larger tax-free gifts in 2006, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being modified for 2006. Key changes affecting 2006 returns, filed by most taxpayers in early 2007, include the following:

The value of each personal and dependency exemption, available to most taxpayers, will be $3,300, up $100 from 2005.

The new standard deduction will be $10,300 for married couples filing a joint return, $5,150 for singles and $7,550 for heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.

The annual gift tax exemption will be $12,000, up from $11,000 in 2005.
Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

Posted under Finance

The Internal Revenue Service today issued a consumer alert about possible scams taking place in the wake of Hurricane Katrina and other recent natural disasters.

Such fraudulent schemes may be perpetrated through the telephone, Internet, e-mail or in-person solicitations. The IRS cautions hurricane victims and people wishing to make disaster-related charitable donations to avoid unscrupulous scam artists by following these tips:

The IRS has established a toll-free disaster assistance telephone number,
1-866-562-5227, specifically for hurricane victims. Whenever a matter involves tax relief or tax refunds, the first step a disaster victim should take is to call the IRS.

For others, donate to recognized charities.

Be wary of charities with names that sound like familiar or nationally known organizations. Some phony charities use names or Web sites that sound or look like those of respected, legitimate organizations. The IRS Web site at IRS.gov has a search feature that allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities may also be found on the Federal Emergency Management Agency (FEMA) Web site at fema.gov.

Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone who solicits a contribution from you. Scam artists use this information to steal your identity and financial resources.

Don’t give or send cash. For security and tax record purposes, contribute by check or credit card. Write the official name of the charity on your check.
“We encourage people to be prudent when they are solicited for disaster donations,” said IRS Commissioner Mark W. Everson. “Don’t be taken in by scam artists more interested in lining their pockets than helping others.”

Scam artists can use a variety of tactics. For example, some scammers operating bogus charities may contact members of the public by telephone to solicit money or financial information. In some cases, they may contact disaster victims and, claiming to be working for or on behalf of the IRS to help the victims file amended tax returns to receive tax refunds, attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources.

The IRS does not ask for personal identifying or financial information in unsolicited telephone calls or mail or via e-mail. Call the IRS toll-free number if you have any doubts as to whether someone is an IRS employee or to verify any information about taxes.

Additionally, bogus Web sites are currently soliciting funds for disaster victims, according to federal law-enforcement agencies. Such fraudulent sites frequently mimic the sites of, or use names similar to, legitimate charities, or claim to be affiliated with legitimate charities, in order to persuade members of the public to send money or provide personal financial information that can be used to steal identities or financial resources.

Members of the public may also have received e-mails that steer the recipient to bogus Web sites that sound as though they are affiliated with legitimate charitable causes.

Taxpayers suspecting disaster-related frauds can:

Report the fraudulent use of the IRS name to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484.

Report other fraudulent contacts either to the Federal Bureau of Investigation (FBI) at 1-800-CALL-FBI (1-800-225-5324) or to the Federal Trade Commission’s (FTC) Consumer Response Center at 1-877-FTC-HELP (1-877-382-4357) (TTY/TDD 202-326-2502).

Posted under Privacy

After a chorus of dissent from employees, the media and advocacy organizations, the Internal Revenue Service has agreed to keep all of its 400 Taxpayer Assistance Centers open.

The walk-in centers, which provide free tax assistance to consumers, would have reduced the number of centers to just over 330. The agency originally argued that more taxpayers were seeking information in other venues, especially online. After massive pressure, however, the agency and crediting a congressional appropriation, the agency agreed to keep the centers open.

“I appreciate the actions the Congress has taken thus far in securing more resources for the IRS, and particularly that the Senate Appropriations Committee has fully funded the President’s request,” IRS Commissioner Mark Everson said.

The president of the union representing IRS employees, Collen M. Kelley, praised the decision, saying, “This decision reverses a plan that clearly would have been counter-productive,” Kelley said.

A list of the IRS’ Taxpayer Assistance Centers is published on the agency’s website.

Posted under Customer Service