As a state Senator, I hear from my constituents on a daily basis, as they describe the issues that matter to them most. One of the most common concerns I hear these days is on the average citizen’s growing tax burden. In 2007, our hard-working citizens pay several different types of tax — sales tax, property tax, ad valorem tax, fuel tax and others. Currently, there is a great deal of ongoing discussion under the Gold Dome about tax reform in our state.
In the meanwhile, one way for Georgia citizens to avoid higher taxes is to avoid some of the most common tax schemes. These blatant scams affect American taxpayers in numerous ways, whether it’s defrauding them out of their hard-earned dollars or causing taxes to rise due to the loss of federal revenues.
Each year, the IRS identifies some of the most ridiculous and harmful tax schemes, and I’d like to highlight some of them this week.
Telephone Excise Tax Refund Abuses: Early filings show some individual taxpayers have requested large and apparently improper amounts for the special telephone tax refund. In some cases, taxpayers appear to be requesting a refund of the entire amount of their phone bills, rather than just the three-percent tax on long-distance and bundled service to which they are entitled. Some tax preparers are helping their clients file apparently improper requests.
Abusive Roth IRAs: Taxpayers should be wary of advisers who encourage them to shift under-valued property to Roth Individual Retirement Arrangements (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.
This technique is 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 loans in their names. These Internet-based criminals pose as representatives of a financial institution — or sometimes the IRS itself — and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. 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. It is very important to note the IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts.
Disguised Corporate Ownership: 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 can be, and are being, used to facilitate underreporting of income, non-filing of tax returns, listed transactions, money laundering, financial crimes and possibly terrorist financing. The IRS is working with state authorities to identify these entities and to bring their owners into compliance.
Return Preparer Fraud: Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote filing fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. 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.”
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 don’t deliver the promised tax benefits. There are currently more than 150 active abusive trust investigations under way and 49 injunctions have been obtained against promoters since 2001.
Abuse of Charitable Organizations and Deductions: The IRS continues to observe the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur 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. Contributions of non-cash assets continue to be an area of abuse, especially with regard to overvaluation of contributed property. In addition, the IRS is noticing the return of private tuition payments being disguised as charitable contributions to religious organizations. In 2007, the General Assembly passed legislation to eliminate this type of tax scheme.
Form 843 Tax Abatement: This scam 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.
Frivolous Arguments: Promoters have been known to make the following outlandish claims: the 16th 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 5th Amendment right against self-incrimination or the 4th 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.
As citizens, it is our duty to report suspected tax fraud. You can do this by using IRS Form 3949-A, Information Referral. Form 3949-A is available for download at www.irs.gov, or by mail by calling (800) 829-3676. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888.
Remember to contact me in my office on the issues that are affecting you and your area.
Sen. Williams is the Senate Majority Leader. He represents the 19th Senate District, which includes Appling, Jeff Davis, Liberty, Long, Montgomery, Tattnall, Toombs, Wayne and Wheeler counties.