Each year, the IRS publishes a list of a dozen tax scams to look out for — and this year, abusive retirement plans made the cut.
The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties.
“The dirty dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said in a press release. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”
When it comes to abusive retirement plans, the IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Advisors are warned against encouraging taxpayers to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.
Of additional concern to retirees are nontaxable social security returns with exaggerated withholding credit. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.
The other 10 scams include:
- Hidden income offshore
- Identity theft and phishing
- Return preparer fraud
- Filing false or misleading forms
- Frivolous arguments
- Abuse of charitable organizations and deductions
- Disguised corporate ownership
- Zero wages
- Misuse of trusts
- Fuel tax credit scams
Advisors can be invaluable in helping their clients navigate tax laws. But by leading clients into a scam, advisors hurt clients and themselves.
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