Tax Evasion Schemes Sound Too Good to Be True.?

When we lived in New York, some 38 years ago, one of the constants upon which one could depend, was the arrest, in March, by the Federal government of one or two Doormen at posh Manhattan apartment buildings and one or two head waiters at an expensive restaurant for tax evasion. The arrested purported tax evaders were paraded in what is now referred to as a "perp walk". The purpose, of course, was to reinforce the notion that hiding income from Uncle Sam would result in going to a place and making new friends who were unlikely to belong to a fancy country club. Both Doormen and head waiters, were recipients of considerable cash receipts over the year and the Internal Revenue Service demanded its fair, or at least legally mandated, share.

Nowadays, it seems, there are all sorts of schemes and theories around that promise reduction or outright elimination of taxable liability. Some of these are quite inventive; none will work. The Feds are quite serious about prosecuting those who promote frivolous arguments to evade taxes and those who fall for the schemes.

The bottom line is that the taxpayer is ultimately responsible for the tax return and the excuse that so-and-so or the Devil made him do it will not fly! Say hello to your new best friend, the one with the tattoo on his hand reading H-A-T-E.

This year, as in the past, the IRS has posted common tax evasion schemes and practices for which they are specifically looking. The full and complete list is on the website, but the most common for the average taxpayer are discussed here.

First, there are the most frivolous assertions. Promoters have been known to make the following outlandish claims: the Sixteenth 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 Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Each and every one of these claims are simply silly and untrue 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. Every year promoters of these schemes end up in jail and the taxpayer-victim of the program gets hit with substantial interest and penalties, at the least. http://www.irs.gov/newsroom/article/0,,id=168637,00.html is very instructive.

Then, there is the Claim of Right, often posed as a refund of all taxes program. In this scheme, a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter advises the taxpayer to label the deduction as "a necessary expense for the production of income" or "compensation for personal services actually rendered." This so-called deduction is based on a misinterpretation of the Internal Revenue Code and has no basis in law.

Finally, I have to acknowledge Tax Preparer Fraud. As full disclosure requires, I note that during the tax season I am employed by Jackson-Hewitt Tax Service as a Preparer. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. 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 old saying goes, "If it sounds too good to be true, it probably is." And remember, 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. During fiscal year 2005, more than 110 tax return preparers were convicted of tax crimes.

As part of the required training for Jackson-Hewitt are hours of training in ethics, compliance and the consequences of filing or abetting the filing of a false or inaccurate tax return.

There are some significant changes in the tax law for this year. I will discuss several of them in a subsequent piece.