IR-2005-19, Feb. 28, 2005 (excerpt)

WASHINGTON — The Internal Revenue Service today unveiled its annual listing of notorious tax scams, the "Dirty Dozen," reminding taxpayers to be wary of schemes that promise to eliminate taxes or otherwise sound too good to be true. These scams manipulate laws governing charitable groups, abuse credit counseling services or rely on refuted arguments to claim tax exemptions.

Involvement with tax schemes can lead to imprisonment and fines. The IRS routinely pursues and shuts down promoters of these scams. But taxpayers should also remember that anyone pulled into these schemes can face repayment of taxes plus interest and penalties. The IRS urges people to avoid these common schemes:

Trust Misuse. The taxpayer is advised to transfer assets into a trust and is promised a reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes.

Frivolous Arguments. Promoters claim that the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.

Return Preparer Fraud. Preparers claim improper refunds, skim a portion of these refunds from their clients, and charge inflated fees for their services.

Credit Counseling Agencies. Some of these organizations claim to fix credit ratings, push debt payment agreements, or charge high fees, monthly service charges or mandatory "contributions," but provide little or no actual assistance.

"Claim of Right" Doctrine. The taxpayer is to file a return and take a deduction equal to the entire amount of his or her wages. The deduction is then labeled as a "necessary expense for the production of income" or "compensation for personal services actually rendered."

"No Gain" Deduction. The taxpayer attempts to eliminate adjusted gross income by deducting the same amount on Schedule A under "Other Miscellaneous Deductions" and attaching a statement to the return, referring to court documents and including the words "No Gain Realized."

Corporation Sole. Participants apply for incorporation under the pretext of being a "bishop" or "overseer" of a one-person, phony religious organization or society with the idea that this entitles the individual to be exempt from federal income taxes as a nonprofit, religious organization.

Identity Theft. Bank customers are sent fictitious correspondence and IRS forms to trick them into disclosing personal financial data; abusive tax preparers use clients' Social Security numbers and other information to file false tax returns without the clients' knowledge; or perpetrators use e-mail to announce to unsuspecting taxpayers that they are under audit and can set matters right by providing financial information on an official-looking Web site.

Abuse of Charitable Organizations and Deductions. Tax-exempt organizations are used to improperly shield income or assets from taxation by moving assets or income to a tax-exempt supporting organization or donor-advised fund, but the taxpayer maintains full control over the assets or income.

Offshore Transactions. Individuals to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts; or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or life insurance.

Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings; or enter zero income, report their withholding, and then write "nunc pro tunc" - Latin for "now for then" - on the return.

Employment Tax Evasion. Employers are instructed not to withhold federal income tax or other employment taxes from wages paid to their employees based on an incorrect interpretation of Section 861 and other parts of the tax law.