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Top Tax Scams for 2009

Apr.1,2009

Introduction

This spring, IRS published its list of tax scams for 2009. Many of the scams are familiar, such as frivolous tax protester arguments, bogus trust arrangements, sham companies, and crooked tax preparers; however, several newer cons involve the use of bogus information forms. Here are the most notable schemes used by tax cheats.

Phishing

Internet-based scam artists use phishing to trick unsuspecting victims into revealing personal or financial information.

This particular phishing scam does not involve taxpayers cheating on their taxes; instead, criminals are impersonating IRS and sending emails to steal financial information from taxpayers.
Note: IRS never uses email to communicate with taxpayers.

Hiding Income Offshore

High on IRS hit list are tax schemes involving off-shore companies and foreign bank accounts.

In addition, IRS is focused on foreign banks which facilitate tax fraud by providing debit cards, credit cards, wire transfers, electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.

To counter these ploys, IRS is pushing voluntary disclosure by taxpayers of their foreign accounts before they get caught.

Phony Forms

Tax-scam artists create fake information returns to claim bogus withholding credits used to produce false claims for tax refunds. Form 843 (Claim for Abatement) is being used to eliminate taxes owed by falsely claiming there was an error in calculating the basis in property sold or in the value of property received for services rendered.

Fraudsters are drafting sham information forms, such as Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to report zero compensation, and then filing phony returns based on the bogus information forms.

Charitable Deductions

Charitable abuses include:
(i) efforts by donors to retain control over donated property;
(ii) false overvaluations for donations of real estate easements and stock of non-public companies; and
(iii) side deals involving the repurchase of donated property at a fraction of the dollar amount claimed as a charitable donation.

Conclusion:

Using the internet, a foreign bank account may be opened or an off-shore company may be created with a couple of button clicks. There is little doubt that Facebook, Twitter and other Web 2.0 social networks and communications will become fertile grounds for a new generation of tax-scam artists. To combat tax fraud, IRS constantly reminds the public that whistleblowers who provide allegations of fraud by filing Form 211 may be eligible for a reward. Sometimes, the reward can be quite substantial.

Limited Amnesty for Off-Shore Accounts

Mar.1,2009

Introduction

Deluged by panicky Swiss account holders fearing criminal indictment stemming from the UBS prosecution (see my February, 2009 newsletter), IRS announced a limited amnesty program for taxpayers hiding funds in secret accounts: In return for paying back tax liabilities in full, they will avoid felony tax crime charges.

Also, the maximum penalty for failing to file a foreign bank account report (FBAR) will be significantly reduced.

Amnesty

In general, taxpayers have a six-month window to file and pay taxes for the past six years, including interest and applicable penalties (negligence -20%; or failure to file – 25%).

The maximum 50% per year penalty for failure to file FBARs will be reduced to a one-time penalty of 20%, based on the highest value of the account during the past 6 years.

Even without an amnesty program, as a result of the UBS case and other ongoing efforts FBAR filings have doubled in 2009 over the same period in 2008.

Of course, escaping criminal tax fraud prosecution is the grand carrot dangled in front of 52,000 UBS customers and others holding secret accounts.

Inherited Accounts

IRS will lower the 20% FBAR penalty to 5% when the taxpayer:
(i) did not open the account;
(ii) there have been no deposits or withdrawals; and
(iii) taxes have been paid on the funds deposited into the account.

The exception was inserted to protect heirs of Holocaust survivors and others who inherited foriegn accounts, and those who were added merely as a signer by the owner.

Information

As part of amnesty, IRS will ask a series of detailed questions to elicit the bankers, lawyers and accountants who participated in the tax evasion scheme.

The responses cause a snowball effect as each disclosure generates additional leads, thus exponentially increasing the odds that a secret account will be exposed, and thereby increasing pressure on reluctant tax evaders to come forward.

Conclusion

For those terrified of criminal indictment, the amnesty program is a blessing.

For the defiant tax evader, IRS has just challenged them to a game of “bet your life” – begrudgingly accept amnesty, or risk losing your fortune and your liberty.

Swiss Bank Admits to U.S. Tax Fraud

Feb.1,2009

Introduction

The shadowy world of Swiss banking — with its secret off-shore accounts and undetectable financial transactions — was dramatically and publically exposed when UBS, AG, Switzerland’s largest bank, entered into a “deferred prosecution agreement” with the U.S. Justice Department on tax massive fraud charges.

UBS must pay a $780 million fine (roughly four years of profits from their criminal enterprise), identify all U.S. clients and stop supplying secret accounts to U.S. taxpayers.

Tax Fraud

UBS was charged with tax fraud because it voluntarily agreed with IRS to report income and withhold taxes on U.S. taxpayers, then it deliberately evaded its responsibilities by using sham entities and fictitious names to open new accounts.

The government contends that from late 2002 to 2007, UBS helped U.S. taxpayers illegally hide $20 billion, thereby evading $300 million in taxes annually.

“007” Intrigue

Acting like James Bond, UBS bankers travelled to the U.S. at least 3,800 times, using encrypted laptops and other counter-surveillance techniques to prevent the detection of the identities and offshore assets of their U.S. clients.

UBS provided U.S. clients with high-tech gadgets containing specially coded computer chips that allowed clandestine access to their accounts and transfers of their wealth. The passwords changed each time the accounts were accessed.

Disclosure

The Justice Department has demanded that UBS disclose the identities and banking records of 52,000 suspected U.S. tax cheats.

The disclosure could ruin Switzerland’s vaunted bank secrecy laws and cripple its international banking system. However, disobeying a court order requiring disclosure would cause UBS to default under the deferred prosecution agreement and its top executives could be indicted on felony tax charges.

Conclusion:

Those U.S. taxpayers with Swiss bank accounts should be, understandably, quaking in their Gucci loafers.

IRS is warning them to come forward voluntarily before they are indentified, or they could be staring at serious criminal tax evasion charges.