07-11-2016, 03:58 PM
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INTRODUCTION
Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws.
A tax shelter is a legal method of minimizing or decreasing an investor's taxable income and, therefore, his or her tax liability. Tax shelters can range from investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored.
No one likes to pay taxes. It's a universal truth. Nonetheless, millions of us pay our taxes and do it properly; we have income and we know that it has to be taxed, we file our returns on time (or get an extension, if needed), and we take only the deductions and credits that we're entitled to take. Not all taxpayers are alike, however.
Some taxpayers don't file tax returns at all, even though they should, because they think that federal income taxes are illegal. Some taxpayers take improper deductions, and some even try to hide money in other countries to avoid being taxed. Not all of these taxpayers purposely take part in such tax schemes, but some certainly do.
Unfortunately, some of us are tricked into believing that the tax schemes are legal ways to reduce our income taxes. This can lead to the IRS charging you hefty fines and penalties. Sometimes criminal charges can be filed against you, which carry even bigger fines and maybe even jail time. Clearly, paying your taxes is important, so you should know about some of the tax avoidance schemes and how to steer clear of them.
TAX – RELATED CRIMES
The most common crime charged by the IRS is tax evasion. This involves a willful, or voluntary and knowing attempt to avoid being taxed or paying a tax. To be convicted, you have to:
Have a tax deficiency, that is, you owe taxes
Make an "affirmative" act to evade or avoid the tax or paying it, such as filing a false return, which might include taking more deductions than you were entitled to
Act willfully, for example, filing a tax return knowing that you should have reported more income than you actually reported
The penalties for tax evasion are steep: A fine of up to $100,000 and up to five years in prison.
Other crimes that you could be charged with include:
Conspiracy, which is when you and at least one other person, such as your tax preparer or your spouse, agree to defraud the IRS by doing something like not reporting income or claiming too many deductions. Again, the penalties can be a fine and imprisonment
False claims, which can come about if you file a false return or make false statements to an IRS agent during an audit when trying to explain why you didn't report all of your income, for instance
SPECIFIC TAX AVOIDANCE SCHEMES
The IRS is aware of and actively investigates numerous tax avoidance schemes, also called tax scams. Some they have come across include:
Anti-Tax Law Schemes
These schemes are based on various arguments that the tax laws aren't valid and that you don't have to follow them or pay taxes. The arguments include things like the tax laws are unconstitutional because the 16th Amendment, which establishes income taxes, is invalid, and that the IRS can assess taxes only against citizens who actually file tax returns. There are numerous arguments, but the fact of the matter is that they've all been rejected by the courts. The federal government can lawfully tax your income, and you have the legal duty to pay it. So, if you meet someone who tells you otherwise, it's best that you ignore him and pay your taxes.
Offshore Schemes
Some taxpayers buy into scams in which they're led to believe that they can escape income taxes if they put their money into bank accounts or businesses in foreign countries. These countries, known as "tax havens," typically have very lenient tax laws and strict rules about disclosing your financial and banking information to others, including the IRS.
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There are legitimate, legal reasons for you to have money or assets in a foreign country, such as when you have a company that actually does business in that country. However, if your only goal is to hide or conceal money to avoid US income taxes, you should know that it's still subject to US income taxes. Usually, the only persons who benefit from these offshore arrangements are those who talked you into the scheme - the "promoters" - who gain by charging you fees for setting up and managing the scheme.
Tax Shelters
Tax shelters are a way for you to legally lower your taxable income, which in turn lowers the amount of taxes you'll owe at the end of the year. There are all kinds of legitimate tax shelters, but one you're probably familiar with is your 401(k) retirement plan that your employer has set up. You put money in the 401(k) throughout the year, and that money is not included in your taxable income.
There are, however, dozens of tax shelters that are illegitimate and are set up to either hide your income or assets or to generate or create false losses on your "investment" that you can use to offset your taxable income. The IRS maintains a list of abusive tax shelters that you should look at before you decide to use a tax shelter.
TOP 10 TAX SCAMS
OVERVIEW
It starts with your phone ringing — the most prevalent tax scam making the rounds this year. The caller claims to be from the IRS and demands your money NOW. Don't think you're the only one singled out for this tactic; aggressive, threatening phone scams occur regularly across the country.
Phone Scams from Phony IRS Agents
If the caller threatens you with police arrest, deportation or immediate criminal action — he's not from the IRS. Phone calls demanding immediate cash payments are made by criminals who impersonate tax agents
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These calls are so common; it's likely you've been a target at some point. San Francisco writer Natasha Dennerstein got the fake IRS call demanding she take cash to a nearby store and hand it over for unpaid taxes.
Dennerstein says the person became very threatening when she questioned his authority. "He told me, 'If you defy me and do not pay, you will feel my strength when I send two officers around to arrest you.'" She refused to pay. "I went to the police station and reported it," Dennerstein said, "but they didn't seem too concerned. They said they've heard a lot of this sort of thing lately."
Don’t be fooled by these callers. Ask for a name, title and phone number, but don’t call back. Report the incident to the police.
Emails Designed to Steal Personal Information
Phishing is a serious scam; it refers to fake emails often claiming to be from the IRS that mention a bill or refund you didn't expect. Remember that tax authorities won't email you out of the blue, so don't open messages supposedly from the IRS.
They are likely fraudulent attempts to steal your Social Security number or other personal information. Think twice or three times before giving out credit card or other financial information online.
False Tax Returns to Pocket Your Refund
Once a criminal gets access to your Social Security number, he or she has everything necessary to file a tax return in your name. The purpose of a fraudulent tax return is, obviously, not to pay your back taxes, but to pocket your refund. This scam occurs early in the tax season, well before most taxpayers file. Take every possible precaution to keep your SSN secret, and if possible, file your taxes early.
False Charities That Solicit Donations
If you lost a family member from a disease or another tragedy, con artists can close in. These scammers target taxpayers who might want to make a tax-free donation to a particular charity. If you get a phone call or email soliciting money to fight disease or assist victims, don't give out cash or financial info. Instead, look up the charity on the Exempt Organizations Select Check tool (https://www.irs.gov/Charities-&-Non- Profits/Exempt-Organizations-Select-Check) to see if it is legitimate.
False Tax Preparers that Pose as Legitimate Professionals
Think of these scammers as wolves in sheep's clothing who pose as legitimate tax preparers or professionals, but actually intend to steal your money.
Victims are often people who don't speak English well or don't understand the U.S. tax system.
Not only do the scammers take a large fee for their "services," but they may also inflate deductions with phony benefits or tax credits, and then have the refund forwarded to their accounts.
Your best bet for avoiding this kind of scam is to ask for references from tax preparers before you sign on the dotted line. You might also consider only using a tax preparer recommended to you by someone you trust. The IRS also has a Federal Tax Return Preparer directory (http://irs.treasury.gov/rpo/rpo.jsf) you can use to search for a tax preparer near you.
Offers to Move Money Offshore
You may have heard that wealthy business people keep financial accounts offshore, so if you get a call or email about moving money overseas, you might be tempted. However, this may be another of the top tax scams, trying to lure you into hiding money in offshore accounts or foreign trusts. If you become a victim of this scam, the money is likely to stay hidden from you as well, and the IRS may prosecute you.
Promises of Getting a Larger Tax Refund Than You're Due
Watch out for scammers who promise to file a return for you and get you a much larger tax refund than you're entitled to. According to the IRS, these con men seek victims by using advertisements, flyers or even false storefronts. If someone tells you to sign a blank tax return or estimates your taxes off the top of his head, it's best to be skeptical.
Offers to Avoid Taxes with Tax Shelters
Some scammers peddle phony tax schemes. Invest your money in certain shelters (https://turbotax.intuittax-tools/tax-tips/Taxes-101/What-Are-Tax-Shelters-/INF15381.html), they claim, and you'll avoid paying taxes. However, these complex tax-avoidance schemes are often illegal, and the IRS prosecutes scammers who create and sell them, along with taxpayers who participate. If you are uncertain if a complicated tax product is legitimate, seek an independent opinion before getting involved.
Promises of "Free Money"
You know in your heart that nobody gives away money, so when you meet scammers who promise "free money" if you file tax returns with them, be wary. These people often target communities or church groups, file incorrect and exaggerated tax returns and pocket the victims' refunds.
Scamming Social Security Refunds
Another tax scam involves promises that you can obtain a large Social Security refund or rebate. Even when you are legitimately owed a refund, criminals will inflate amounts in the tax return and steal the refund.
Other scammers claim they can use IRS forms to transfer funds from the Social Security Administration to the tax authorities. The victim, they claim, will get a check from the IRS, but that's not likely to happen.
Hesitate before signing on with a tax preparer who promises you far more than you expected to get in a refund. If you have doubts about the legality of the schemes proposed, consider obtaining a second opinion.
WHAT ARE TAX SHELTERS
OVERVIEW
A tax shelter is any legal strategy you employ to reduce the amount of income taxes you owe. After receiving much attention in the news in recent years, the term "tax shelter" has a negative connotation relating to deceptive and illegal schemes to evade income tax. However, this is not always the case. A tax shelter is also any legal strategy you employ to reduce the amount of income taxes you owe.
Sheltering your income with deductions
Claiming deductions is a perfectly legal way to reduce the amount of income tax you pay to the IRS. You can easily accomplish this tax shelter by choosing to spend your income on expenses that can lead to a deduction.
For example, it’s perfectly legal and reasonable to pay college tuition expenses with a student loan rather than a credit card for no reason other than to take advantage of the student loan interest deduction. If you prefer to make a large number of charitable donations during the year with the sole purpose of reducing your income tax bill, the IRS will never challenge your charitable deduction as long as you satisfy all requirements of the deduction.
Tax shelters using investments
In addition to claiming deductions, you can also shelter income from tax by choosing investments that provide the maximum tax savings. The IRS encourages taxpayers to save for retirement by allowing them to deduct a certain amount of contributions to a traditional IRA account. In addition, you achieve tax deferral on all investment income and gains in the IRA since the IRS will not impose an income tax on those earnings until you retire and start making withdrawals.
Illegal tax shelters
When evaluating an investment, the IRS encourages you to consider the doctrine of "substance over form." What this means is that if a tax strategy is illegal, it doesn’t become legal just because you call it something else.
For example, the federal tax law prohibits you from assigning income you earn to another taxpayer who is subject to lower tax rates. If you earn $200,000 during the year as an independent contractor, you are responsible for paying all of the income tax on it.
Sheltering your income with deductions
Claiming deductions is a perfectly legal way to reduce the amount of income tax you pay to the IRS. You can easily accomplish this tax shelter by choosing to spend your income on expenses that can lead to a deduction.
For example, it’s perfectly legal and reasonable to pay college tuition expenses with a student loan rather than a credit card for no reason other than to take advantage of the student loan interest deduction. If you prefer to make a large number of charitable donations during the year with the sole purpose of reducing your income tax bill, the IRS will never challenge your charitable deduction as long as you satisfy all requirements of the deduction.
Tax shelters using investments
In addition to claiming deductions, you can also shelter income from tax by choosing investments that provide the maximum tax savings. The IRS encourages taxpayers to save for retirement by allowing them to deduct a certain amount of contributions to a traditional IRA account. In addition, you achieve tax deferral on all investment income and gains in the IRA since the IRS will not impose an income tax on those earnings until you retire and start making withdrawals.
Illegal tax shelters
When evaluating an investment, the IRS encourages you to consider the doctrine of "substance over form." What this means is that if a tax strategy is illegal, it doesn’t become legal just because you call it something else.
For example, the federal tax law prohibits you from assigning income you earn to another taxpayer who is subject to lower tax rates. If you earn $200,000 during the year as an independent contractor, you are responsible for paying all of the income tax on it.