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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 unwary.

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 Increasing

Why do people who are intelligent, honest, hardworking business owners and entrepreneurs get caught in the tax scammers’ nets? According to the IRS, it’s 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 wouldn’t be going to someone else to have your taxes prepared.

What Do Some Scams Look Like?

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 year.

  • You cannot deduct business expenses for a business that does not truly exist (yes, some people apparently have tried this one!).

  • 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 own children.

  • In addition, you can‘t deduct “education expenses” from salaries you paid to children who couldn’t 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 creative!)

  • 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 Bad

You’ve 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 ahead—choose 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 you’ve 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 don’t get a refund?).

  • 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 state’s 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 attorney.

What To Do If You Have Been Scammed

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.

REFERENCES:

Internal Revenue Service:

Advice for Choosing a Tax Preparer.” IRS Tax Tip 2006-06.

Abusive Home-Based Business Tax Schemes.” February 4, 2004.

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 Master’s degree in career counseling. She has worked in business, government, agriculture and media, including a stint as a business reporter for a daily newspaper.

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