Caution Ahead - Tax Scams Alive
& Doing Well
Home-based business owners may be lured
this tax season by promises of bigger tax refunds through the use of
little-known tax shelters or business-related deductions only to find
later that Uncle Sam does not have a sense of humor or even sympathy for the
You Are Responsible
The bottom line is that you are
responsible for the accuracy and content of your tax return and the payment of
your proper share of taxes whether you prepare your return or have
someone else do it. Many tax-preparation companies, and even professionals,
often do not make that clear. Even if you take advantage of the loan that
allows you to get your refund in a matter of days, should the
U.S. Internal Revenue Service
(IRS) find an error on your return that reduces your refund, you remain
responsible for the payment of the remainder of the loan. Yes, read all that
fine print some time it can contain some surprises.
Scams & Schemes Are
Why do people who are intelligent,
honest, hardworking business owners and entrepreneurs get caught in the tax
scammers nets? According to the IRS, its not because they are
trying to cheat the government or get out of paying their fair share of taxes.
In fact, most taxpayers with home-based business accurately report their income
and expenses, while enjoying the benefits and legitimate tax breaks that having
a home-based business can offer.
One of the primary reasons these tax
scams and questionable schemes have become popular is because no one wants to
pay MORE than their fair share of taxes. Most taxpayers, in fact, would like to
reduce the amount of taxes they pay.
Another reason people get involved in
these situations is because many unscrupulous promoters sell tax avoidance and
tax return audit assistance as packages of services. This is not to say that
all of the tax preparation and assistance packages that are advertised are
unethical or illegal. The popularity of one-stop shopping has
resulted in many reputable, large accounting and tax preparation firms offering
convenient, multiple-service, tax-time packages.
Taxpayers may not even realize when
they are receiving unsound even illegal advice from financial
advisors and tax preparers. After all, if you knew all the ins-and-outs of the
U.S. tax code, you wouldnt be going to someone else to have your taxes
What Do Some Scams Look
Have you ever heard someone talk about
all the taxes they saved by setting up a business in their home with the
intention that it would always be unprofitable or that exists on paper only?
Often these people claim that they, therefore, can deduct all kinds of personal
expenses as business expenses.
Remember if something sounds
too good to be true, it probably is! The IRS warns that non-deductible
personal living expenses cannot be magically transformed into deductible
business expenses no matter what the slick-sounding promotional
marketing materials may say and how convincingly they say it!
Here are some of the more common and
popular tax schemes and shelters that are either highly suspect or
are outright illegal:
- You cannot set up a new business and transfer
money and assets into it to avoid paying income taxes this is called tax
evasion! If you are a corporate executive, you cannot transfer your stock
options into a family-controlled partnership to avoid paying income taxes!
- Taxpayers cannot invest in (or, as noted above,
start) a business that promises to lose money in order to offset a high-income
- You cannot deduct business expenses for a
business that does not truly exist (yes, some people apparently have tried this
- As a home-based business owner, paying your
children a salary for doing non-business-related tasks or even some
business-related tasks -- is not a deductible expense. The IRS looks very
carefully when a business owner claims a deduction for salaries paid to their
- In addition, you cant deduct
education expenses from salaries you paid to children who
couldnt truly be claimed as employees.
- You cannot deduct personal travel, meals and
entertainment by saying that everyone in the seaside resort is a potential
client for your home-based business. (I thought this one was particularly
- Placing a calendar, desk, file cabinet, telephone
or some other business-related item in each room of your house does not allow
you to deduct all (or even most) of the cost and operation of your home, nor
does that strategy even increase the amount that you can deduct.
- When your car or truck is used for both personal
and business reasons, be very careful to keep track of how much use was
business and how much personal the IRS will want proof, if the
deductions seem to be excessive.
Separating The Good From The
Youve decided that you just
cannot prepare your own tax return this year, and are looking around for a good
tax preparer. Finding an honest, qualified tax professional usually is not
difficult if you do a little homework and follow a few guidelines:
- Plan aheadchoose a tax preparer who is
going to be around and whom you can find after your return is filed and tax
season is over. Someone who just set up a new storefront tax service in January
and whom youve never seen before may need a little more checking out.
Also, make sure that the tax preparer will listen to your needs and situation
and not have a one-size-fits-all agenda.
- Ask about service fees Watch out for
preparers who claim they can get you a larger refund than any other preparer.
Also, be cautious about preparers who guarantee results or who base fees on a
percentage of the amount of your refund (what happens if you dont get a
- Get references Ask your potential tax
preparer questions about their customer service policy and history. Get
references from clients who have used the tax professional before and
contact them! See how satisfied they were with the service they received.
- Do your research A check with the local
Better Business Bureau may save you much future grief. If the potential tax
preparer is an accountant, check with your states Accountancy board; if
an attorney, check with the state Bar Association. Also, ask the preparer what
professional organizations he or she belongs to and whether or not that
organization has continuing education requirements or a code of ethics. Mabel,
who works on a manufacturing assembly line and does tax return preparation a
couple of months a year, may be cheaper initially, but may cost you much more
down the road.
- Check their credentials versus your needs
Some tax preparers, such as Certified Public Accountants (CPAs) and attorneys,
can represent you before the IRS in all situations, including audits,
collection actions and appeals. Other tax return preparers may have lower fees,
but can only represent you before the IRS in audits regarding a tax return they
signed as the preparer. If your business situation is complex and your tax
return complicated, you may want to consider the advantages of a CPA or tax
What To Do If You Have Been
If you have been, or even suspect you
have been, the victim of a tax scammer or are aware of an abusive tax preparer
in your community, you may report it to the IRS on an Information Referral form
(Form 3949-A), which can be downloaded from the
IRS Website, or just send a
letter to: Internal Revenue Service, Fresno, CA 93888. You also can call the
IRS to report a tax scheme at 1-866-775-7474.
Internal Revenue Service:
Advice for Choosing a Tax Preparer. IRS Tax Tip
Abusive Home-Based Business Tax Schemes. February 4,
Rozbruch, Michael. Warning Signs: To avoid trouble, stay away from these tax
shelters. Entrepreneur Magazine, February 2006. Entrepreneur.com:
© 2006 Patricia C. Dinslage. All rights reserved worldwide.
Article written by Pat Dinslage,
IAHBE Staff Writer
Pat Dinslage is a freelance writer and staff writer for
IAHBE. She has BA degree
in Economics, BS degree in journalism and is currently earning a Masters
degree in career counseling. She has worked in business, government,
agriculture and media, including a stint as a business reporter for a daily