IR-2003-18, Feb. 19, 2003

WASHINGTON — In an update of an annual consumer alert, the
Internal Revenue Service urged taxpayers to avoid falling victim to
one of the "Dirty Dozen" tax scams. In the new 2003 ranking,
several new scams have reached the top of the consumer watch
list, including offshore banking and identity theft schemes. "With
the tax season in full swing, we're seeing the traditional upswing in
tax trickery," said IRS Acting Commissioner Bob Wenzel. "Year
after year, con artists across the nation try pulling a fast one on
honest taxpayers with different types of miracle tax solutions. Don't
be fooled by the 'Dirty Dozen' and other misleading scams. There
is no secret way to get out of paying taxes." The IRS and other
federal agencies are aggressively pursuing and successfully
prosecuting promoters of these schemes and many of their clients
for fraud and tax evasion. These can result in imprisonment, fines
and repayment of taxes owed with interest and penalties. Even
innocent taxpayers involved in these schemes can face a staggering
amount of back interest and penalties. Taxpayers who suspect tax
fraud can report it to the IRS at 1-800-829-0433. The IRS urges
people to avoid these common schemes:

Offshore Transactions. Some people use offshore transactions
to avoid paying United States income tax. Use of an offshore
credit card, trust or other arrangement to hide or underreport
income or to claim false deductions on a federal tax return is illegal.
Through April 15, the IRS is offering people with improper
offshore financial arrangements a chance to make things right.
Eligible taxpayers who step forward will not face civil fraud and
information return penalties. A taxpayer involved in these schemes
who does not come forward now, however, will be subject to
payment of taxes, interest, penalties and potential criminal
prosecution. People interested in participating in the program,
called the Offshore Voluntary Compliance Initiative, can contact
the IRS by calling 215-516-3537 (not toll-free).

Identity Theft. Identity thieves use someone's personal data to
steal his or her financial accounts, run up charges on the victim's
existing credit cards, apply for new loans, credit cards, services or
benefits in the victim's name and even file fraudulent tax returns.
The IRS is aware of at least two recent identity theft scams
involving taxes or the IRS. In one, tax preparers allegedly used
information, such as Social Security numbers and financial
information, from their clients' tax returns to commit identity theft.
In another, fraudsters sent bank customers fictitious bank
correspondence and IRS forms in an attempt to trick them into
disclosing their personal and banking data. For taxpayers, it pays
to be choosy about disclosing personal and financial information.
And the IRS encourages taxpayers to carefully select a reputable
tax professional.

Phony Tax Payment Checks. In this scheme, con artists sell
fictitious financial instruments that look like checks to pay a tax
liability, mortgage and other debts. The con artists may also
counsel their clients to use a phony check to overpay their taxes so
they can receive a refund from the IRS for the overpayment. The
false checks, called sight drafts, are worthless and have no
financial value. It is illegal to use these sight drafts to pay a tax
liability or other debts.

African-Americans Get a Special Tax Refund. Thousands of
African-Americans have been misled by people offering to file for
tax credits or refunds related to reparations for slavery. There is no
such provision in the tax law. Some unscrupulous promoters have
encouraged clients to pay them to prepare a claim for this refund.
But the claims are a waste of money. Promoters of reparations tax
schemes have been convicted and imprisoned. And taxpayers
could face a $500 penalty for filing such claims if they do not
withdraw the claim. In early 2002, the slavery reparations scam
ranked as the No. 1 scheme on the Dirty Dozen list. Following a
sweeping public outreach campaign and assistance from members
of the Congressional Black Caucus and other organizations, the
number of reparation scam claims fell sharply. Tens of thousands
of claims were received in 2001, but the claims fell to less than 50
per week in 2002.

No Taxes Withheld From Wages. Illegal schemes are being
promoted that instruct employers not to withhold federal income
tax or employment taxes from wages paid to their employees.
These schemes are based on an incorrect interpretation of tax law
and have been refuted in court. A recent flurry of court actions has
been taken against promoters of these schemes. Taxpayers who
have concerns about their employer and employment taxes can get
help by calling the IRS at 1-800-829-1040.

Improper Home-Based Business. This scheme purports to
offer tax "relief" but in reality is illegal tax avoidance. The
promoters of this scheme claim that individual taxpayers can
deduct most, or all, of their personal expenses as business
expenses by setting up a bogus home-based business. But the tax
code firmly establishes that a clear business purpose and profit
motive must exist in order to generate and claim allowable business
expenses.

Pay the Tax, Then Get the Prize. The caller says you've won a
prize, and all you have to do to get it is to pay the income tax due.
Don't believe it. Someone who really wins a prize may need to
make an estimated tax payment to cover the taxes that will be due
at the end of the year. But the payment goes to the IRS – not the
caller. Whether the prize is cash, a car or a trip, a legitimate prize
giver generally sends both the winner and the IRS a Form 1099
showing the total prize value that should be reported on the
winner's tax return.

Frivolous Arguments. Frivolous arguments are false arguments
that are unsupported by law.When a scheme promoter says "I
don't pay taxes – why should you" or urges you to "untax yourself
for $49.95," beware. These scams are as old as snake oil, but
people continue to be taken in. And now they're on the Internet.
The ads may say that paying taxes is "voluntary," but that's just
plain wrong. The U.S. courts have continuously rejected this and
other frivolous arguments. Unfortunately, hundreds of people
across the country have paid for the "secret" of not paying taxes or
have bought "untax packages." Then they find out that following
the advice contained in them can result in civil and/or criminal
penalties. Numerous sellers of the bogus schemes have been
convicted on criminal tax charges.

Social Security Tax Scheme. Taxpayers shouldn't fall victim to
a scam offering refunds of the Social Security taxes they have paid
during their lifetimes. The scam works by the victim paying a
"paperwork" fee of $100, plus a percentage of any refund
received, to file a refund claim with the IRS. This hoax fleeces the
victims for the up-front fee. The law does not allow such a refund
of Social Security taxes paid. The IRS processing centers are alert
to this hoax and have been stopping the false claims.

"I Can Get You a Big Refund ...for a Fee!" Refund scheme
operators may approach someone wanting to "borrow" their
Social Security number or give him or her a phony W-2 so it
appears that the person qualifies for a big refund. They may
promise to split the refund with that person, but the IRS catches
most of these false refund claims before they go out. And when
one does go out, the participant usually ends up paying back the
refund along with stiff penalties and interest. Two lessons to
remember: 1) Anyone who promises someone a bigger refund
without knowing their tax situation could be misleading them, and
2) Never sign a tax return without looking it over to make sure it's
honest and correct.

Share/Borrow EITC Dependents. Unscrupulous tax preparers
"share" one client's qualifying children with another client in order
to allow both clients to claim the Earned Income Tax Credit. For
example, one client may have four children but only needs to list
two to get the maximum EITC. The preparer will list two children
on the first client's return and the other two on another client's tax
return. The preparer and the client "selling" the dependents split a
fee. The IRS prosecutes the preparers of such fraudulent claims,
and participating taxpayers could be subject to civil penalties.

IRS "Agent" Comes To Your House To Collect. First, do
not let anyone into your home unless they identify themselves to
your satisfaction. IRS special agents, field auditors and collection
officers carry picture IDs and will normally try to contact you
before they visit. If you think the person on your doorstep is an
impostor, lock your door and call the local police. To report IRS
impostors, call the Treasury Inspector General's Hotline at 1-800-
366-4484.

Beyond the "Dirty Dozen," the IRS sees many more tax schemes.
Some examples include home-based business scams, disabled
access credit for pay phones and a variety of improper abusive
trusts. "The best advice for taxpayers is to remember the concept
of 'buyer beware,'" Wenzel said. "Think carefully before paying for
services or signing important documents. And don't be fooled by
outrageous promises. If something sounds too good to be true, it
probably is."

Tax Fraud and Scams