How Some Taxpayers Get Caught in Tax-Avoidance Schemes

By: David M. Reape

October 26, 2023

Although the majority of tax preparers are ethical and assist their clients in filing timely and accurate tax returns, a minority misuse their position of trust. For example, they may participate in fraudulent operations that affect taxpayers. The IRS has issued a warning about tax “promoters,” businesses that “undermine voluntary compliance by marketing improper methods to reduce the amount of taxes legally owed.” Such promotions can put businesses and individuals at risk financially and legally.

A Wide Range of Schemes

Some unscrupulous tax preparers and promoters urge clients to file false returns and participate in aggressive tax-evasion schemes. You should be aware of the following tax schemes:

Fuel Tax Credit Claims. The fuel tax credit mainly encourages the use of off-highway and farming fuels and encourages companies to employ renewable resources. Dishonest tax preparers and promoters may urge taxpayers to claim the credit, reduce their taxable income, and receive an inflated refund in order to inflate returns. Taxpayers who are told to claim a credit that isn’t available to them should just say “no.”

Compromise Mills. When taxpayers are unable to pay their tax bill, they may submit an “Offer in Compromise” to the IRS. This is a request for the outstanding sum to be settled for less than the amount owed. Some tax promoters advertise their capacity to obtain Offers in Compromise – and demand exorbitant fees to “determine” if a person qualifies for one. Paying such costs to a third party is unnecessary because the IRS has a free online tool to determine eligibility (irs.gov, search for “Offer in Compromise”) that any taxpayer can use. The IRS, on the other hand, imposes a $205 application fee.

Fraudulent Charitable Remainder Annuity Trust. Individuals can use Charitable Remainder Annuity Trusts (CRATs) to give assets to charity while also paying income to at least one living beneficiary. Any leftover funding is distributed to a qualifying charity after 20 years of payments or when a beneficiary dies. Some promoters attempt to persuade taxpayers to set up a CRAT in order to avoid capital gains on property provided to the trust account. However, improper use of CRATs can subject taxpayers to IRS investigation and legal issues.

Aside from being careful of these methods, taxpayers should be wary if a preparer charges a fee based on the size of a return. After all, the fee structure encourages the preparer to intentionally inflate tax credits and deductions while underreporting income. Tax preparers who refuse to sign a return or who appear to sign with someone else’s information are another cause for concern.

Select the Best Advisor

Some preparers and promoters take advantage of the tax code’s complexities to commit fraud and charge exorbitant costs. Clients should challenge a tax preparer if the return provides a substantial refund, has questionable credits, or is unduly complex and difficult to understand. Because of the prevalence of these dishonest tax preparers, it is even more crucial to hire honest and professional ones. Please contact us for further information and assistance.