By Lance Wallach
“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”
Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes.
Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.
419 plans
412i plans
Captive insurance plans
These were listed transactions and then taken off the list. IRS still looks closely at them. They are usually sold by life insurance agents.
Section 79 plans
IRS is looking very closely at section 79 plans. They are usually sold by life insurance agents.
Hiding Income Offshore
The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.
Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.
Filing False or Misleading Forms
The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.
Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
Return Preparer Fraud
Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. 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 saying goes, if it sounds too good to be true, it probably is. 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, which are pending in court.
Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.
False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."
Disguised Corporate Ownership
Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.
Zero Wages
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.
Fuel Tax Credit Scams
The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Showing posts with label IRA. Show all posts
Showing posts with label IRA. Show all posts
Be Advised - Everything is Not Fine
BeAdvised - Everything is not fine
By Lance Wallach
A few years ago, I testified as an expert witness in a case where a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value” policy in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance broker “a crook.”
Keeping that in mind, you should know that the IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.
Who is involved
For the business owner, the motivation is a large tax deduction. For the insurance broker and the insurance carrier, the motivation is a substantial commission. Thus, the IRS is cracking down on accountants, insurance brokers and other.
If your client is (or was) in a 412(i), 419, captive insurance, or Section 79 plan, then you may be in big trouble.
If you are an accountant and signed a tax return for a client in one of these plans, you are probably what the IRS calls a “material adviser” and subject to a maximum $200,000 fine.
If you are an insurance professional that sold or advised on one of these plans, the same holds true for you.
What happened
Both business owners and brokers need to file properly under Section 6707A or face large IRS fines. In many cases, the accountant filed the appropriate forms, but the IRS still levied the fine because the accountant made a mistake when filling out the form.
The improper preparation of these forms usually results in the client being fined more quickly than if the form were not filed at all. My office has reviewed many forms and we have not yet seen one that was filled out properly.
The IRS will be soon attacking Section 79 scams as well, I am told. In Section 79 scams, small business owners are told that they can take a tax deduction through their businesses to purchase life insurance. That sounds good, but when you break down the math and sales pitch, it doesn’t make sense.
Predictions come true
In articles I wrote for the American Institute for Certified Public Accountants back in the ‘90s, I predicted attacks by the IRS on 419s. Those predictions came true.
Then I predicted attacks on 412s. They came true too.
Now I’m predicting that these Section 79 scams will be attacked.
How to act
To protects themselves, everyone in these Section 79 plans should file protectively under Section 6707A, and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on and has extensive experience filing protectively.
The IRS has its task forces auditing these plans now; after that they will move on to the Section 79 scams and the brokers who sold them.
I have been an expert witness in a lot of cases involving 412(i) and 419 issues. They rarely go well for brokers, accountants, plan promoters, or insurance companies.
Watch your back
If you are an insurance professional, it’s important to understand that you should not count on your insurance company to back you up.
Based on what I have seen, insurance companies are more likely to stab you in the back. In an IRS investigation, the insurance companies settle first, leaving the brokers hanging. Then, in many cases, they fire the brokers.
So be careful. If you sold plans, gave tax advice, or signed a tax return and got paid a certain amount of money, you may be a material adviser, and subject to a fine of up to $200,000.
Wallach, a member of the AICPA faculty of teaching professionals, is a frequent speaker and writer on retirement plans, financial and estate planning, and abusive tax shelters. He can be reached at wallachinc@gmail.com
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
By Lance Wallach
A few years ago, I testified as an expert witness in a case where a physician was in an abusive 401(k) plan with life insurance. It had a so-called “springing cash value” policy in it. The IRS calls plans with these types of policies “listed transactions.” The judge called the insurance broker “a crook.”
Keeping that in mind, you should know that the IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.
Who is involved
For the business owner, the motivation is a large tax deduction. For the insurance broker and the insurance carrier, the motivation is a substantial commission. Thus, the IRS is cracking down on accountants, insurance brokers and other.
If your client is (or was) in a 412(i), 419, captive insurance, or Section 79 plan, then you may be in big trouble.
If you are an accountant and signed a tax return for a client in one of these plans, you are probably what the IRS calls a “material adviser” and subject to a maximum $200,000 fine.
If you are an insurance professional that sold or advised on one of these plans, the same holds true for you.
What happened
Both business owners and brokers need to file properly under Section 6707A or face large IRS fines. In many cases, the accountant filed the appropriate forms, but the IRS still levied the fine because the accountant made a mistake when filling out the form.
The improper preparation of these forms usually results in the client being fined more quickly than if the form were not filed at all. My office has reviewed many forms and we have not yet seen one that was filled out properly.
The IRS will be soon attacking Section 79 scams as well, I am told. In Section 79 scams, small business owners are told that they can take a tax deduction through their businesses to purchase life insurance. That sounds good, but when you break down the math and sales pitch, it doesn’t make sense.
Predictions come true
In articles I wrote for the American Institute for Certified Public Accountants back in the ‘90s, I predicted attacks by the IRS on 419s. Those predictions came true.
Then I predicted attacks on 412s. They came true too.
Now I’m predicting that these Section 79 scams will be attacked.
How to act
To protects themselves, everyone in these Section 79 plans should file protectively under Section 6707A, and anyone who has not filed protectively in a 419 or 412(i) had better get some good advice from someone who knows what is going on and has extensive experience filing protectively.
The IRS has its task forces auditing these plans now; after that they will move on to the Section 79 scams and the brokers who sold them.
I have been an expert witness in a lot of cases involving 412(i) and 419 issues. They rarely go well for brokers, accountants, plan promoters, or insurance companies.
Watch your back
If you are an insurance professional, it’s important to understand that you should not count on your insurance company to back you up.
Based on what I have seen, insurance companies are more likely to stab you in the back. In an IRS investigation, the insurance companies settle first, leaving the brokers hanging. Then, in many cases, they fire the brokers.
So be careful. If you sold plans, gave tax advice, or signed a tax return and got paid a certain amount of money, you may be a material adviser, and subject to a fine of up to $200,000.
Wallach, a member of the AICPA faculty of teaching professionals, is a frequent speaker and writer on retirement plans, financial and estate planning, and abusive tax shelters. He can be reached at wallachinc@gmail.com
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Transfer Pricing
The IRS dedicates enormous resources toward dealing with taxpayer’s who are involved with any form of transfer pricing. The transfer pricing provisions of IRC 482 address four general types of transactions between commonly owned or controlled parties.
1- Use or transfer of tangible property
2- Services
3- Loans
4- Use or transfer of intangible property (especially cost sharing agreements)
Use of tangible property: When one member of a controlled group rents or leases property to another member of the group, the price paid for use of such property must equal an arm’s length amount. Per Treas. Reg. 1.482-2(c )(2)(i), the arm’s length amount is determined by reference to the amount that would have been charged between independent parties for use of the same or similar property under similar circumstances.
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