The IRS urges people to avoid these common tax scam schemes:
- Trust Misuse. Unscrupulous promoters for years have urged taxpayers to transfer assets into trusts.
- Frivolous Arguments. Promoters have been known to make the following outlandish claims: that the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary.
- Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys.
- Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment agreements or charge high fees.
- "Claim of Right" Doctrine. In this scheme, a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages.
- “No Gain” Deduction. Similar to “Claim of Right,” filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A.
- Corporation Sole. Since September 2004, the Department of Justice has obtained six injunctions against promoters of this scheme and filed complaints against 11 others. Participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society.
- Identity Theft. It pays to be choosy when it comes to disclosing personal information.
- Abuse of Charitable Organizations and Deductions. The IRS has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation.
- Offshore Transactions. Despite a crackdown on the practice 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.
- Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings.
- 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.
IRS Announces the 2005 Dirty Dozen Tax Scams [IRS.gov, Feb. 28, 2005]