Dodging illegal tax avoidance schemes

By J. A. (Jay) Lesemann Jr., CPA

Among all the bits of advice that taxpayers hear, perhaps the soundest adage is, “If it sounds too good too be true, it probably is.” Why, then, do honest, hardworking, tax-paying citizens fall for tax-avoidance schemes year in and year out? The answer is that, understandably, most of us are looking for ways to pay as little income tax as possible. That’s why, when questionable companies hold seminars telling participants that they can discover tax deductions that “the government does not want you to know about,” many citizens are ready to believe in this conspiracy — and to buy the book that reveals all the previously untold secrets.

Indeed, some self-proclaimed tax “professionals” — both individuals and companies — will guarantee you a bigger refund than you could ever get on your own or by using the tax preparer down the street.

The tax law, however, is the tax law. If you compare two tax professionals that have had the training and education necessary to prepare your tax return, you’ll rarely find much difference between the two.

Here are our top 10 illegal tax avoidance schemes that are being promoted currently. Be especially cautious when you hear these claims:

1. Never Pay Taxes Again!

This scam often will encourage a worker to instruct his or her employer not to withhold federal income taxes from wages. This advice is based on an incorrect interpretation of the U.S. tax law and continually has been denied in tax courts.

Other scams of this nature pertain to moving all your assets and accounts to offshore bank and brokerage accounts, setting up a foreign trust, employee leasing schemes, and other attempts around tax laws. These have received considerable press in the past few years and are high on the IRS’s radar screen.

2. I Don’t Pay Taxes — Why Should You?

In this scenario, scam artists will hold fee-based seminars where they will “share their secret.” According to public sources, what is not told is that in reality, these scammers do pay taxes — taxes on fees collected for their seminar!

3. Deduct the Cost of Your Personal Residence!

This scheme supposedly offers a way for individual taxpayers to deduct most, if not all, of their personal expenses as business expenses by setting up a fake home-based business. Only real business expenses that can be substantiated are deductible.

4. Deduct the Cost of Your Child’s Education!

Although in some situations costs associated with your child’s private education can be deducted (children with special needs, for example), most of the time this is a bogus strategy and is also at the top of the IRS’s “hit list.”

5. I Can Get You a Big Tax Refund – for a Fee!

A conniving tax preparer lures you in with the promise of a hefty refund. The preparer’s fee often is inflated and is “taken off the top” of any monies due the taxpayer. Sometimes, the preparer will create a fake W-2 for the taxpayer that shows more monies withheld than actually occurred. Any taxpayer who submits this kind of return can be prosecuted for filing a fraudulent return.

6. Share or Borrow Earned Income Tax Credit (EITC) Dependents!

For this scam, tax preparers will “share” one taxpayer’s children with another taxpayer. To receive the maximum EITC tax credit, taxpayers are required to have two children. If taxpayer 1 qualifies for EITC and has four children, the tax preparer, with the consent of taxpayer 1, will use the other two children for taxpayer 2’s return. The preparer and taxpayer 1 will then split the fee that is charged to taxpayer 2. This, of course, is an illegal maneuver.

7. Put Your Money in a Trust and Never Pay Taxes Again!

In a scheme, similar to the “Never Pay Taxes Again” scam, promoters of this device will charge you a fee for their “trust” package that will prepare trust documents and use foreign and/or domestic trustees, along with foreign-owned bank accounts. For a trust to be legitimate and not directly taxable to the taxpayer, ownership of the trust assets must be completely separate from the taxpayer’s control and benefit.

8. Taxes are Unconstitutional — Pay for Our Seminar and We Will Show You!

This is an age-old phrase that some taxpayers still believe. Those who advocate this course of action and don’t pay taxes that are due should be prepared to pay the price when prosecuted. You can pay now or you can pay later — with interest and penalties and possibly jail time.

9. The IRS Doesn’t Want You to Know About This!

If a deduction is legal and justifiable, the IRS wants you to use it. As stated in IRS literature, “The mission of the IRS is to provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

10. So New, Your Tax Professional Doesn’t Even Know About It!

In this seminar, taxpayers learn about “new” tax laws that in essence are not laws at all. Taxpayers are discouraged from seeking a second opinion because no one else knows about it.

As a final recommendation: Ask your tax preparer what tax-related classes he or she has taken this year. Every year the tax laws change. If your preparer doesn’t keep up to date on these changes, you may have problems down the road.

The best way to save money on your taxes is to work with a well-schooled, experienced and reputable CPA. These actual professionals know how to find a large number of legal deductions that average taxpayers often overlook or misperceive. By thoroughly examining your particular tax situation, your CPA can work with you to file a return that both sounds good for you and remains true to IRS regulations.

About the author

J. A. (Jay) Lesemann Jr., CPA, is managing member of Lesemann & Associates PLLC — Certified Public Accountants in Huntersville, N.C., with emphasis placed on “Companies and Individuals That Are on the Cusp of Change.” For over 20 years, he has worked with organizations ranging in sales of $400,000 to $2 billion. Lesemann has held the positions of CFO, vice president of Finance and Administration, and director of Information Technology in both publicly and privately held companies. He also spent four years with PriceWaterhouse. His experience includes master debt financing agreements, initial public offerings, venture capital funding, mergers and acquisitions, new company startups, financial system selection and implementation, and turnaround management. Originally from Gallatin, Tenn., Lesemann graduated from the University of Mississippi with a bachelor’s of accountancy. He currently sits on the board of a Charlotte-based electronic recycler and refurbisher, Northwest School of the Arts and the North Carolina Association of Certified Public Accountants — Charlotte Chapter. He is also a teacher/professor with the Institute for Entrepreneurship for Central Piedmont Community College, Charlotte, N.C.

He can be reached at (704) 948-2735 or at Jay@LesemannCPA.com.

Note: The following information is provided to you by third parties for informational purposes only and shall not constitute tax or legal advice. Microsoft Corp. has not checked or verified any of the information provided and makes no representations or warranties as to its accuracy. Each individual’s tax situation is unique, and you should check with your accountant or other tax professional for particular advice on your situation.