12/30/11: Tax scams that can get you into big trouble with the IRS
By Benny L. Kass
(First of a Series)
The income tax created more criminals than any other single act of government.
— Sen. Barry Goldwater (R-Ariz).
Every year at this time, I write a series of tax-related columns. I try to provide some guidance for homeowners preparing to file their income tax return.
Between now and the due date, April 17, you might be contacted by someone claiming that, for a fee, they will guarantee that you do not have to file your return nor pay any tax.
Don’t be fooled. Every year, the Internal Revenue Service publishes its “dirty dozen” list of scams, from hiding income in offshore accounts to filing false or misleading forms. “The dirty dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. Taxpayers should not “fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them,” he added.
Here are a few of these frivolous tax arguments:
- The IRS must prepare federal tax returns for a taxpayer who fails to file. Wouldn’t this be nice? No more fees to accountants, and many software computer programmers would be out of business.
This position is erroneously based on a provision of the tax code (Section 6020) that allows the IRS to determine the tax liability of a taxpayer and to prepare a tax return for persons who do not file or who file a false return. Supporters of this position argue that this gives them the right not to file and that the IRS will do it for them, without penalty. But the IRS has won numerous court cases against people who attempt this.
- Only foreign-source income is taxable. Here is yet another creative — but erroneous — assumption. Those who support this position claim that federal income taxes are excise taxes imposed only on nonresident aliens and foreign corporations, for the privilege of receiving income from sources within the United States.
The IRS wants the American taxpayer to understand that this is completely false. According to the IRS, numerous convictions have been obtained against persons who promoted and preached this position.
- The United States consists only of the District of Columbia, federal territories and federal enclaves. For those of us who live in the District, this argument adds insult to injury. The motto on the D.C. license plate is “taxation without representation.” Proponents of this argument take the position that such places as the District, Guam, Puerto Rico and all of the Indian reservations are the only places where the income tax is applicable.
The IRS has successfully brought numerous criminal court cases against those who support this position.
- African Americans and Native Americans can claim a special tax credit as reparations for slavery and other oppressive treatment. This is a topic often debated in the halls of Congress. But unless and until legislation is enacted to provide reparations, it is not the law.
There are also a number of frivolous arguments based on the Constitution:
- Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment. If this were true, none of us would have to pay any income tax. The First Amendment provides all Americans the right to freedom of speech and press, to peaceably assemble without fear of government inference and to practice the religion of our choice.
It does not, however, give us the right to refuse to pay taxes on the income we earn.
- Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment. This amendment protects persons from being “deprived of life, liberty, or property, without due process of law.“
The Internal Revenue Code provides all taxpayers with ample due process, including the right to go to the United States Tax Court to challenge a deficiency asserted by the IRS, even before paying the contested tax.
- Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment. This is a creative — but baseless — argument. Numerous courts have thrown out this claim, based on an old Supreme Court case, United States v. Sullivan.
Indeed, all of these arguments — and more — continue to crop up on a yearly basis. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties.
The penalty for filing frivolous returns was increased in 2006 from $500 to $5,000.
In fact, taxpayers who rely on these arguments may face other penalties, including a fine of up to $250,000 and imprisonment for up to five years for attempting to evade or defeat tax; and a fine of up to $250,000 and imprisonment for up to three years for making false statements on a return.
Next: A Primer on Real Estate Deductions
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.