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5. Corporation Sole. Participants apply for incorporation under pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society with idea that this entitles individual to exemption from federal income taxes as a nonprofit, religious organization. When used as intended, Corporation Sole statutes enable religious leaders to separate themselves legally from control and ownership of church assets. But rules have been twisted at seminars where taxpayers are charged fees of $1,000 or more and incorrectly told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts.
6. Offshore Transactions. Despite a crackdown, individuals continue 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 to do so. The IRS continues to aggressively pursue taxpayers and promoters involved in such abusive transactions.
7. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on return. The IRS takes a very poor view of this tactic.
8. Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of tax law and has been refuted in court. Recent cases have resulted in criminal convictions, and courts have issued injunctions against more than a dozen persons ordering them to stop promoting scheme. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes. The employees, however, can sue their employer for damages.
Inappropriate tax schemes come and go, so 2005 list is fairly standard stuff with one exception. The spread of identity theft schemes is troubling, particularly when thieves pretend to act as IRS agents. Be careful out there.
Richard Chapo is CEO of BusinessTaxRecovery.com - We recover overpaid business taxes for small businesses. 80% are due refunds of $5,000 to $10,000 on past tax filings. How much you are owed?