The Internal Revenue Service recently issued its 2008 "dirty dozen" list of the 12 most egregious tax schemes and scams. Topping this year's list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers. New to the "dirty dozen" this year is a scheme that relates to unreasonable and/or excessive fuel tax credit claims.
In related news, actor Wesley Snipes was sentenced in federal court to three years in prison for failing to file tax returns or to pay taxes. As it happens, Snipes attempted to use item #3 on the dirty dozen list, "Frivolous Arguments" to avoid paying taxes for several years.
"Taxpayers should be wary of scams and promises to avoid paying taxes that seem too good to be true," Acting IRS Commissioner Linda Stiff said. "Be wary of anyone peddling any of these scams."
The tax code offers a wealth of opportunities for you to lower your overall tax liability. You can do so without breaking the law or falling into any "dirty dozen" traps. The key is to use Bulletproof Veil to systematically understand and apply the tax law in a compliant fashion. Enroll now or contact your Bulletproof Veil representative for more information.
Wesley Snipes and the IRS "Dirty Dozen"
Wesley Snipes' Adventures in Tax
In the most prominent tax prosecution since billionaire hotel owner Leona Helmsley, who famously stated "only little people pay taxes," actor Wesley Snipes was convicted of three charges of failing to file tax returns or pay taxes. Snipes was sentenced to three years in federal prison.
Snipes is a high profile example of the tax-denier movement, whose members maintain that Americans are not obligated to pay income taxes and that the government extracts taxes from its citizens illegally.
Tax deniers assert that no law makes anyone liable for taxes and that the government tricks people into paying. Promoters of tax denial claim that people can legally stop paying income taxes by executing certain documents, or by not signing others, such as tax returns. Courts have rejected all of these arguments.
Snipes' lawyers tried to defend Snipes at trial by portraying him as a victim of bad advice by his co-defendants. They called his tax theories "kooky," "crazy" and "dead wrong," but said acting on these views did not make him a criminal because he disclosed his actions.
The Supreme Court has ruled that tax deniers can demonstrate the absence of criminal intent by asserting that they "sincerely believe" that they are not required to pay taxes, although they cannot escape the levies.
In one 600-page document, Snipes said he was legally a "nontaxpayer" and the tax laws did not apply to him because he was not a resident of the District of Columbia, was not a federal official and was not engaged in any trade or business, all common tax denier arguments. The IRS publishes a list of common frivolous arguments.
Ironically, when all is said and done, Wesley Snipes will end up having paid much more in taxes, penalties and legal fees than if he had properly filed and paid his taxes. Notwithstanding written pleas for leniency from friends like Denzel Washington and Woody Harrelson, Snipes now has to spend three years in federal prison contemplating his tax theories.
The IRS "Dirty Dozen"
Every year the IRS announces its top twelve tax scams and schemes. Here is the list for 2008:
1. Phishing - tricking victims into revealing personal information over the Internet so their financial accounts may be accessed.
2. Scams Related to the Economic Stimulus Payment - criminals posing as IRS agents trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get an economic stimulus payment.
3. Frivolous Arguments - making unreasonable and unfounded claims to avoid paying taxes (like Wesley Snipes). The complete list of frivolous arguments is on the IRS Web site at www.irs.gov.
4. Fuel Tax Credit Scams – making claims for the fuel tax credit that are unreasonable. Some individuals are claiming the tax credit when their occupation or income level makes the claim unreasonable.
5. Hiding Income Offshore – trying to avoid paying taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans.
6. Abusive Retirement Plans – abusing retirement plan arrangements, including Roth IRAs. Be wary of advisers who encourage you to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value.
7. Zero Wages - filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed.
8. False Claims for Refund and Requests for Abatement - fraudulent requests for abatement of previously assessed tax using Form 843, "Claim for Refund and Request for Abatement."
9. Return Preparer Fraud - dishonest tax preparers skim a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds.
10. Disguised Corporate Ownership - forming domestic shell corporations to disguise ownership of a business or financial activity. These entities can be used to facilitate underreporting of income, non-filing of tax returns, and other financial crimes.
11. Misuse of Trusts - unscrupulous promoters urge inappropriate transfers of assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Some trusts do not deliver the promised tax benefits.
12. Abuse of Charitable Organizations and Deductions – several misuses, including arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property.
Summary & Conclusion
Honest people who understandably want to obey the law often overpay their taxes because they believe the only alternative is to participate in schemes like the IRS "dirty dozen". Not true – you can legally save thousands of dollars annually if you systematically manage your tax burden, which for many people is their most significant asset protection threat.
The key is to know and follow the rules. Bulletproof Veil can help. Enroll today and contact your Bulletproof Veil Representative for more information.
Material discussed is meant for illustration and/or informational purposes only and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, note that individual situations can vary.
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- July 2008 - The Oil Industry, CERCLA, and Corporate Veil Piercing
- June 2008 - Take Care Before You Invest IRA Money in a Private Buisness
- May 2008 - Wesley Snipes and the IRS "Dirty Dozen"
- April 2008 - Bear Stearns, Subprime Mortgage Loans, and Veil Piercing
- March 2008 - The Supreme Court Just Made Your Retirement Plan MoreRisky
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Be Clear on How You Own Your Assets
A basic asset protection strategy is to change how your assets are owned in order to protect them. The idea is to "quarantine" assets – separate them from liability threats, and isolate assets from one another so no single threat can attack everything at once. This can involve tactics like putting assets into trusts or limited liability business entities, or utilizing tenancy-by-the-entirety ownership.
Many people understand the quarantine principle. Most have already created protective trusts or business entities. But a surprising number never get around to actually transferring their assets into these protective entities. If an irrevocable trust or LLC doesn't legally own an asset, asset protection benefits are lost.
At Bulletproof Veil we constantly monitor and audit your circumstances to search out problems like failed asset transfers. It's amazing how often we find people who are sure they have put their wealth into trusts or business entities, but an analysis of the records shows they still own the assets in their own name. When this happens, you are in the worst of both worlds – you've paid for asset protection, but you're still completely exposed.
A transfer of assets has to be documented and recorded as a gift, a sale, or an exchange for value in order to be valid and withstand the scrutiny of courts or the IRS. Pay attention to these key principles:
1. Clarify the form of the transaction – is the asset transfer a gift? If so, understand and address any unified credit or gift tax consequences. Is the asset transfer a sale? If so, be clear on who's selling, who's buying, the price, and whether a taxable gain is created. Is the asset transfer a capitalization of a business entity? If so, have a formal appraisal that the courts or IRS will accept.
2. Document the transaction – proper documentation of asset transfer transactions is crucial. Documentation requirements differ depending on the form of the transaction and the asset type. Personal assets may require a bill of sale. Real estate will require a deed of transfer such as a quitclaim deed. If the asset is going into a trust or business entity, trust or corporate documents must be updated. Stock might have to be issued. Without proper documentation, you can't prove an asset transfer ever took place.
3. Update public records – countless times Bulletproof Veil has researched title records on real estate only to find that the owner of public record is not the same as what is stated in trust agreements or corporate records. We also frequently see problems where an asset has a mortgage or lien, and creditors have not been advised of a change in legal ownership. Problems like these can create painful and costly disputes.
4. Treat the asset appropriately given its ownership status – if you transfer an asset to some other legal entity, it's no longer yours. You may have retained rights to use or enjoy the asset, but you must always be mindful of its ownership status and behave accordingly. For example, you can't sell an asset belonging to an LLC and keep the money in your personal account.
It's the little details of follow-through that tend to trip people up. That's why the monitoring and tracking of Bulletproof Veil is so valuable. Contact your Bulletproof Veil representative for more information.
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How to Deal With Check Bouncing Bad debt can be a problem for many businesses. Customer checks that bounce can be particularly troublesome. Bounced checks of $300 or less are too small for small claims court or collections agencies, but can add up and hurt your bottom line. If you suffer from chronically bouncing checks, contact your bank or credit card processing company about check service programs. These programs offer a check scanner tapped into a national database. If the scanner approves the check, the service guarantees it. Generally, check scanning costs about 2% of your check sales.
Douglas Shulman became the 47th Commissioner of Internal Revenue on March 24, 2008. He presides over the nation's tax administration system, which collects approximately $2.4 trillion in tax revenue that funds most government operations and public services. Shulman came to the IRS from the Financial Industry Regulatory Authority (FINRA), the private-sector regulator of all securities firms doing business in the United States.
Chastened Homeowners Convert Adjustable Mortgages to Fixed-Rate Loans - (Bloomberg) Mortgage refinancing in the U.S. is increasing as record numbers of homeowners dump their adjustable-rate mortgages for the security of a fixed loan. The amount of refinanced home loans will reach $321 billion by the end of June, the most in a year, according to estimates from Washington-based Fannie Mae. Nine out of 10 borrowers will choose a fixed rate. Property owners are abandoning adjustable-rate mortgages to ward off the prospect of higher payments.
Malpractice Insurers Requiring Personality Tests - (AM News) In a sign of the rising obstacles to getting good medical liability insurance, some insurers are requiring physicians to take a communication skills assessment – in essence a personality test – before they will approve a malpractice policy. United Medical Liability Insurance Co. is among the latest to require such tests. In a 15-minute online test, doctors must respond to statements that gauge how they view themselves and how they believe others view them. The test attempts to measure things such as whether the physicians is a risk-taker, if they have a good bedside manner, and other issues in hopes of reducing medical liability claims.
IRS Agent Guilty of Tax Fraud A former IRS Revenue Agent was sentenced to a year in jail for obstructing the IRS by fraudulently attempting to sell to other taxpayers, and using on his own personal income tax returns, tax losses belonging to a separate company he controlled. Harry Willner attempted to have other taxpayers, who were owed income, direct the fee payment to his company, which would report it as income. The company would not pay tax on the payment because the income would be offset by the company’s tax losses. Willner would then remit the money, less a fee for himself, to the other taxpayer disguised as a loan repayment.
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