Practicing tax professionals are forever amazed at the tales of woe they hear from unsuspecting, naive taxpayers and people who though they knew more than they did. But even tax-conscious, sophisticated businesspeople fall victim to tax schemes.
Generally, these schemes promise the individual taxpayer a very large refund or the ability to forgo paying federal income taxes. Taxpayers becomes so enamored with the idea of finding the hidden loophole that when they finally wake up to reality, they could face a huge tax bill or, in some cases, a trip to Club Fed.
To avoid either of these outcomes, pay close attention to your tax returns and be on the lookout for too-good-to-be-true promises. Here is the IRS’ annual “Dirty Dozen” list of tax schemes.
1. Trust misuse
2. Frivolous arguments
3. Return preparer fraud
4. Credit counseling agencies
5. “Claim of right” doctrine
6. “No gain” deduction
7. Corporation sole
8. Identity theft
9. Abuse of charitable organizations and deductions
10. Offshore transactions
11. Zero return
12. Employment tax evasion
Typically, these schemes are thought up by so-called tax gurus, whose only purpose is to create sophisticated schemes and, for a fee, share them.
You’re probably saying, “These schemes don’t relate to me.” That may be true, but odds are you have a friend, employee or family member who has fallen victim to these charlatans.
Be wary of an accountant or return preparer who promises large refunds or complete nonpayment of taxes, especially if, after a 15-minute interview, they report that your refund is the largest you have received in 25 years of filing returns, even though your basic lifestyle has not changed. Also be wary of the accountant or tax preparer who tells you that you don’t have to file.
The Internal Revenue Code is very simple at its core — if you earn a certain amount of money (the threshold is dependent on your single/married status), you are required to file a tax return. Period.
Granted, determining those taxes is complicated. However, a basic premise to live by is that all income is taxable except if exempted by law. Likewise, no expense is deductible unless allowed by law.
Therefore, you can save only so much on your taxes. And, in the end, you, the taxpayer, are ultimately responsible for the final return filed.
It is imperative that you know the background of the person who will be preparing your return. Ask about credentials and fees. Even with solid credentials, be on the watch for of things that just don’t make sense. As in everyday life, common sense goes a long way in taxes.
Follow these guidelines, and you’ll sleep soundly after filing your taxes.
* If fees charged are proportional to the refund, be suspicious.
* Ask if the preparer is a certified public accountant (CPA), attorney or enrolled agent (EA). EAs take a comprehensive exam administered by the IRS specifically relating to tax issues. CPAs and attorneys are licensed by the state, and you can access any disciplinary actions brought against them through the state’s bureau of professional affairs.
* If it sounds too good to be true, it probably is. Find another preparer.
Robert P. Brennan is a certified public accountant (CPA) and certified fraud examiner (CFE) and director for CBIZ Accounting, Tax & Advisory in Plymouth Meeting, Pennsylvania. CBIZ, a publicly traded company and the 10th largest accounting firm nationally (Accounting Today), provides a wide range of assurance, tax and consulting services to small and mid-sized companies. Reach Brennan at [email protected] or (610) 862-2202.
