Tax "tricks" that seem too good to be true usually are not true. Participating in clever schemes that are actually scams can leave you in dire need of tax debt relief. Here are four tax scams to avoid and how to recognize them.
Scam #1: "Income taxes are unconstitutional"
Arguments about what the U.S. Constitution says about taxing citizens on personal income are an interesting debate, but don't get taken in by those who say you're not obliged to file income tax returns and pay applicable income tax.
Seminar leaders can get you excited about beating the system by filing blank tax returns and sticking it to "The Man." Unfortunately, those seminar leaders won't be there to provide you with tax debt relief when the IRS rejects your arguments and starts levying your savings accounts and seizing your property. You, and you alone, are responsible for the contents of your tax return. You don't want to have to tell the IRS you thought you owed them nothing because a seminar leader was an eloquent speaker.
Scam #2: "Just file for that tax credit"
The IRS estimates that up to one-third of Earned Income Tax Credit claims are fraudulent or erroneous. The earned income credit is a refundable tax credit aimed at lower-income workers with children, and it is a major area of emphasis for IRS correspondence audits (otherwise known as those unpleasant letters).
Other tax credits that have seen abuse are:
- Tax rebates offered in certain years (such as the telephone tax rebate in 2006)
- Child tax credit
- Energy efficiency credits
Tax credit abuse is common because tax credits reduce taxes dollar for dollar and can be used to create fraudulent tax refunds. Again, though, by the time the fraud is discovered and the need for tax debt relief has arisen, the scheming tax preparer who filed the bogus credits is nowhere to be found.
Scam #3: "That's part of my 'home business' "
The tax benefits of having a home-based business are fairly well-known. By using part of your home as an office, for example, you can reduce your income taxes through deductions related to your expenses, such as rent or mortgage interest, property taxes, and even a portion of the utility bills.
Fake home-based businesses that exist solely to help their owners avoid income taxes are a bad idea, though. Be particularly careful about paying family members wages related to a home-based business. Failure to file 1099s or W-2s for those wages can land you in deep tax debt.
Always make sure that your home-based business has a profit motive over and above a tax reduction motive.
Scam #4: "Accelerate those retirement plan deductions"
In recent years, some business advisors have gotten a little ambitious in their advice related to employee benefit plans, such as 401(k) plans. These cases are unfortunate because the business owner who got the bad advice usually does not understand the benefit plans in question.
Customarily, retirement plan scams that result in a need for tax debt relief are related to the "acceleration" of deductions for the business owner. Anytime you hear the word "acceleration" with reference to deductions, slow down and take a hard look at the tax advice being offered.
When it comes to filing your taxes, be diligent, be smart and be aware. By avoiding scams, you can protect yourself from future tax debt issues and run-ins with the IRS.