Tax Scams: 7 Tax Scams to Steer Clear of Plus 1 Real Way to Earn Free Money
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Thursday, January 15, 2004: Issue #305
“Look Steve, it says right here in this book that paying taxes is unconstitutional,” an old neighbor told me. He was showing me a book a friend had shared with him – a book by a known promoter of “tax protesting” scams.
“My friend says I shouldn’t pay my taxes. He says I should just let the government come after me if it wants to.”
Has he lost his mind? Does he really believe that will work? Can you imagine a judge or jury (people that pay their taxes) agreeing that he doesn’t have to pay his taxes?
There are countless tax scams to steet clear of today: from the “taxes are unconstitutional” ploy to off-shore “tax-free” havens. So many in fact, that to cover them all would take way more time and space than we have here today.
So let’s focus on the IRS’s “Dirty Dozen” tax scams. Specifically, we’ll look at 7 of the most widely used tax scams, and tell you what it takes to make sure you don’t end up behind bars. And then we’ll close with a basic, legal, “free money” tax tip to ease your tax bill.
7 Tax Scams From The IRS’s Dirty Dozen
“The IRS urges people to avoid these common schemes,” on its web site. That’s putting it politely! You’ll end up behind bars if you’re busted! Let’s take a look at a few of the IRS’s current “dirty dozen” tax schemes that you or someone you know might get in trouble with
1. Offshore Transactions. Simply stated from the IRS, “Use of an offshore credit card, trust or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal.” So don’t do it.
2. Identity Theft. Scamsters send people bogus letters claiming to be from their bank or the IRS to trick them into sending personal data. The scamsters then use this information to “steal” your identity and spend all your money. Never divulge personal information unless you’re 100% comfortable with who’s receiving it. A
3. African-Americans Get a Special Tax Refund. “Thousands of African-Americans have been misled by people offering to file for tax credits or refunds related to reparations for slavery. There is no such provision in the tax law. Some unscrupulous promoters have encouraged clients to pay them to prepare a claim for this refund. But the claims are a waste of money. In early 2002, the slavery reparations scam ranked as the #1 fraud committed on the “Dirty Dozen” list. Don’t fall for this.
4. Improper Home-Based Business. The pitch you’ll hear from scamsters is that you can deduct most of your personal expenses by setting up a bogus home-based business. The IRS says, “a clear business purpose and profit motive must exist in order to generate and claim allowable business expenses.” You know if your business is real or not.
5. “Pay the Tax, Then Get the Prize.” A scamster calls and says you’ve won a prize you just have to pay the taxes on the prize and it’s yours. “Whether the prize is cash, a car or a trip, a legitimate prize giver generally sends both the winner and the IRS a Form 1099 showing the total prize value that should be reported on the winner’s tax return.” To avoid getting taken, remember a tax payment should go to the IRS, not the caller.
6. Frivolous Arguments. Ah, here’s my old neighbor “Unfortunately, hundreds of people across the country have paid for the “secret” of not paying taxes or have bought “untax packages.” Then they find out that following the advice contained in the packages can result in civil and/or criminal penalties. Numerous sellers of the bogus schemes have been convicted on criminal tax charges.” There’s no such thing as an “untax package.”
7. IRS “Agent” Comes To Your House To Collect. Pop-star Justin Timberlake was “Punk’d” with this one Fake IRS agents showed up at his door, told him he owed hundreds of thousands of dollars in back taxes, and started seizing his stuff. This isn’t the way it happens. “IRS special agents, field auditors and collection officers carry picture IDs and will normally try to contact you before they visit. If you think the person on your doorstep is an impostor, lock your door and call the local police.”
A Legal Tax Trick… A $3,000 Investment Can Make You $2,430 In Free Money
I can give you all the investment tips in the world but it’s hard to beat free money from the IRS. And there is free money out there including this legal way to reduce IRS taxes you normally pay. You’re probably aware of it: Simply stuff your retirement plans to the gills.
I don’t know why most people fail to stuff their retirement plans. If you just put as little as $3,000 into your company’s retirement plan (your 401k), then it will likely create $2,430 in free money. Here’s how
You invest $3,000 into your 401k retirement plan. Your employer matches your contribution by 50%, so that’s the first $1,500 in free money. That brings your total retirement investment to $4,500. If you’re in a 31% tax bracket, that would translate to $930 more dollars of Free Money money that would otherwise have gone to the government in income tax. $1,500 plus $930 equals $2,430 in free money. And the numbers could get much better, depending on your plan. For 2004, in some plans you can contribute up to $13,000 (more if you’re over 50).
Even better, you’ve still got time to give yourself some free money based on this year’s tax return. You’ve got until April 15 to stuff your non-corporate retirement plan to the gills.
If you’re self-employed, you can stuff up to $40,000 in your SEP-IRA, and that money comes off the top of your income, saving you up to $12,000+ in taxes (free money to the tune of $12,000!). If you’re not self-employed, you can stuff your IRA. You can put up to $3,000 into an IRA (or $3,500 if you’re over 50), for a tax savings of roughly $1,000. More free money!
Don’t Make a Taxing Situation Something Worse
I’m no tax expert. Far from it.
But I do understand that I don’t want to be behind bars, so I want to steer clear of anything that smells funny. And I know that I like no-risk, free money.
Those are my guiding tax principles steer clear of the funny stuff, and take full advantage of all the 401k-type free money that’s offered. I’d suggest the same for you
Good investing,
Steve
Today’s Investment U Cribsheet
- See the entire Dirty Dozen list from the IRS at the Service’s web site.
- I’m a bit uncomfortable writing about taxes, as I have no expertise here. What I can point you in the direction of someone I trust CPA Henry Hurst does my taxes here in Florida. If you’re looking for a good tax man, you may want to give him a try 904-261-5575.
- Tax-Managing Your Investment Portfolio: There’s Still Time to Cut Your 2008 Taxes
- Defining Investment Jargon: Force Majeure
- Your Individual Retirement Account (IRA): Resolutions for Wealth & Happiness in 2009
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