The Tax Man Cometh...
With the tax filing deadline fast approaching Wednesday, the Internal Revenue Service will crack down on offshore tax evasion, while taking extra measures to help Americans struggling to survive the current recession, commissioner Douglas Shulman said today.
"We're going to go the extra mile during these difficult economic times to help you out if you're in distress," Shulman said in a speech at the National Press Club.
"We need to walk in the taxpayers' shoes," he said. "We need to see things from their perspective. We need to be in tune with their situation. We need to take each taxpayer as they come and ensure that we are treating people fairly and compassionately, especially during these difficult economic times."
But the IRS must balance the desire to help hurting taxpayers with the need to recoup much-needed government funds. As the government has shelled out record sums of money to address the economic crisis, the nation has run up a record budget deficit of $956.8 billion in the first six months of fiscal year 2009.
"This is a very fine line for us," he said. "On the one hand, we need to raise the funds to run the government -- I think the American people are counting on their government to do a lot more for them as we try to work our way through this recession -- and we have to be tough on those that flout the law, that won't pay what they owe."
Shulman's stern warning was directed at Americans engaging in international tax evasion as he promised to break down "the much-vaunted veil of secrecy".
"In today's economic environment, it's more important than ever that the American public feels confident that individuals and corporations are playing by the rules and paying the taxes they owe," he said. "With so many of our friends and our neighbors feeling deep financial pressures as they struggle to stay in their homes and pay for the most basic necessities of life, there is very little tolerance for those that have the means to pay their taxes, but shirk their responsibilities."
However, some of the high-profile people who have faced tax problems have been none other than a number of President Obama's Cabinet nominees. A handful of nominations were derailed by tax issues, including Department of Health and Human Services secretary nominee Tom Daschle.
But the nation's tax chief today chalked such problems up to "inadvertent errors", instead choosing to highlight that there were "a phenomenal number of people who have gotten nominated and sailed right through."
In the coming weeks, as the IRS cracks down on tax evasion, Shulman emphasized that the agency also wants to do its part to help needy Americans.
"Tax filing season is also its own stimulus for the economy," he pointed out, recalling that last year, 24 million poor Americans received about $48 billion in earned income tax credit.
The task of collecting tax revenues while remaining compassionate for recession-ravaged taxpayers is by no means the only challenge Shulman faces.
As he starts his second year of a five-year term at the head of the agency, the IRS boss must manage the handling of more than 150 million individual tax returns this year, compared to only 14 million individual returns back in 1940. He is now responsible for collecting $2.4 trillion in tax revenue, overseeing more than 100,000 employees, and handling a budget of more than $11 billion.
The huge increase in the intake of tax returns is just one of many recent changes Shulman must combat. The agency now also faces the challenges of skyrocketing big business and recent globalization.
From 1995 to 2006, filings by businesses with more than $250 million in assets increased by 85 percent, he said. Since 2000, the number of individual foreign tax credits has increased by more than 170 percent.
Another sign of the IRS' growing responsibility is the 353 million visits to its Web site last year, making it the 10th-most trafficked business Web site in the world, Shulman said.
"The number one happens to be Wal-Mart," he noted.
One way to help Americans, he suggested, would be to simplify the nation's "incredibly complex" tax code.
"Any efforts for simplification certainly would be helpful to the American people and certainly would reduce a number of inadvertent errors," he stated.
With so many challenges ahead, Shulman told the guests gathered at the press club luncheon one of his frequent reminders for agency employees.
"The IRS represents the face of the government to more American people than any other federal institution," he said. "At the end of the day, everything runs through the IRS."
The Dirty Dozen: Top 12 Tax Scams to Cheat the Tax Man
Want to steer clear of tax scams? The IRS today also released the "Dirty Dozen", a list of the top 12 tax scams, such as phishing, hiding income offshore and making false claims for refunds.
Here is how the IRS described these scams:
Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim's identity, access bank accounts, run up credit card charges or apply for loans in the victim's name.
Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to email@example.com. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov.
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.
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."
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 which is considered prohibited.
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.
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.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov.
The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation.
The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.
Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.