Wesley Snipes began serving a three-year prison term for tax evasion in December 2010. On March 3, 2011, one of Snipes’ former tax advisors, Kenneth I. Starr, was sentenced to more than seven years in prison after pleading guilty to wire fraud, money laundering, and fraud by an investment advisor.

Snipes has claimed that his failure to pay income tax was because he followed the advice of advisors such as Starr who turned out to be scammers. He claims to be an innocent victim.

My point in writing about this doesn’t have anything to do with whether Snipes was actually duped or thought he could get away without paying his taxes. My point is this that there are a lot of scammers out there who are taking advantage of genuinely innocent people and giving them really bad advice about their tax strategies. It’s good to see justice for at least one of them.

The average taxpayer who takes a bogus deduction or credit isn’t likely to end up in prison. What will probably happen is that the deduction will be disallowed, interest and penalties will be tacked on to the debt, and the taxpayer will end up paying many times more than what he thought he was going to save.

If you file your tax return yourself, be sure you thoroughly understand and follow the rules for the deductions and credits you take. If you use the services of a professional tax preparer, be sure to check that person out to make sure he or she really knows the tax code and is going to give you appropriate and legal guidance. Should you take advantage of every tax break available to you? Absolutely. But don’t let yourself fall victim to bad advice or even a scam that will cost you much more in the future than you might save today.

While I cannot speak for the rest of the team of tax consultants here at JK Harris & Company, I am providing this list based on my own personal experience. Here are the top ten reasons (or causes) clients make an appointment to see me for back tax debt.

1. Earned income tax credit – Just because you claim a child on your return does not mean you qualify for the EITC. Don’t claim the EITC unless you know you are entitled to it. Be sure to do your homework and use the IRS’ EITC calculator.

2. Raising your exemptions – on your W-4 to have less taxes withheld. If you think money is tight now, how will you pay a large bill at tax time?

3. Withdrawing retirements funds – The 10% penalty paid is not equivalent to the taxes due. Making this withdrawal may put you in a different tax bracket.

4. Is your spouse forgetful? Double check that your spouse really did submit the tax returns.

5. Self employed or not? Review what it means to be self employed, as there are requirements to meet. If you are, be sure to pay your estimated taxes on a quarterly basis.

6. Got supporting docs? You must have supporting documents for all claimed expenses. Estimating your expenses will not hold up should you get audited.

7. Larger refund than usual? If the local guy all your buddies go to gets everyone large refunds, he may be setting you up for an audit and tax problems. When the IRS system sees a pattern emerge, all of that tax preparers returns may be audited.

8. Did you inherit a windfall? If your inheritance is from a retirement account, taxes are due upon withdrawing the money.

9. Did you default on an installment agreement? If you agree to an installment agreement or IRS payment plan, you must pay it. I have seen clients who set this up with the IRS on their own but were nervous about dealing with the IRS. Often times, they committed to a payment above their means, then end up unable to make the monthly payments.

10. Submit your returns, even when you cannot pay. By filing your tax returns, you will avoid larger penalties. If you do not file your return, you are penalized with the failure to file and failure to pay fines. Filing your return and paying what you can will help reduce the amount you are penalized.

Employees who earned less than $48,000 in 2010 may qualify for the Earned income Tax Credit, or EITC. The IRS estimates that up to one in four qualifying individuals will fail to claim and receive the credit. At JK Harris, we believe that no one should pay more in taxes than they are required to by law and that every taxpayer should take advantage of all the deductions and tax credits to which they are legally entitled.

The Earned Income Tax Credit or the EITC is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. In other words, some individuals can pay zero in taxes and still get a check from the government for the EITC. In addition, many states offer a similar credit; click here for a list of states with an EITC.

To qualify for the EITC, taxpayers must meet certain requirements and file a tax return, even if they would not otherwise be required to file.

Use your company communication channels to let your employees know they may be eligible for this tax credit. Include notices with their paychecks and W-2 forms; put posters up in employee break rooms; post information about the EITC on your company intranet site; write an article for your company newsletter; send an email blast to all employees; and include information about the EITC in your new employee orientations.

Don’t let your employees pay more in taxes than they should. Tell them about the EITC today.

One of the more common ways small business owners get into trouble with the IRS is by getting behind on their payroll taxes. Normally you would pay your employees, withhold the appropriate taxes (income and employment taxes), and remit those funds along with your (as the employer) share of your federal tax deposit to the IRS on a monthly or quarterly schedule (depending on the size of your payroll). When you pay your employees, withhold the appropriate taxes, and then don’t send the funds to the IRS, you can find yourself in serious trouble.

To read more, click here.

JK Harris leaves South Carolina today to begin his job creation speaking tour in Boston. He plans to meet with business leaders in Boston (and in future cities) to discuss how entrepreneurs and business owners can grow their companies, create jobs and jump start economic recovery at the local level, in their own communities.

Visit The Flashpoints blog to find out more information on Mr. Harris’ tour or to sign up for the free Flashpoints newsletter. The Flashpoints newsletter was created for the small business owner and is published once a month. As a bonus, when you sign up to receive the newsletter, you will also receive the free e-book, “The Mindset of High Achievers.”

CNN Money ran an article a few weeks ago which talks about six new breaks for small business owners.

Own a business? 6 new tax breaks by Catherine Clifford

Doing your taxes stinks, right? No fun at all. But take note as you brace for your 2010 return: A handful of changes in the tax code could translate into a fatter refund check.

The Small Business Jobs Act, passed last September, and the historic health care reform law, passed in March, enacted hefty credits and deductions for capital investments and employee health insurance costs.

Here is a rundown of six new credits and deductions likely to affect the most small business owners. Read the rest of the article here.

Marcos Esparza Bofill was shocked to find out he owed over $172 million in back tax debt. Esparza Bofill moved to New York i from Spain in 2006 when he decided he wanted to try his hand at day-trading. After one year – and barely surviving on a “beer budget” and no profit – he decided to go back home to Spain.

Esparza did not know he was required to file a tax return during the year he was swapping stocks. But, the IRS was tracking his every move – and they assumed that Esparza made pure profit on his day trading transactions. This would have given Esparza Bofill a whopping $500 million in income.

“Who is the IRS?” Esparza was said to have asked of his American friends. One friend commented that Esparza thought he was kidding when he told him the IRS had hit him with a $172 million dollar tax bill.

Marc Albaum, a Manhattan CPA points out that the tax lien will probably be completely resolved when Esparza Bofill files his tax return for the year in question.

“When you do not file a return, the IRS assumes you made pure profit,” said Albaum. “Now the remedy here is simply to file (a tax return). He could wipe out anything he owes.”

The federal court ruled Ms. Quinn could still be prosecuted even though she paid the tax debt right before her trial date. According to the law, any person “required to collect, account for and pay over” trust fund taxes and who “willfully fails to collect or truthfully account for and pay over such tax shall in addition to other penalties provided by law, be guilty of felony and upon conviction thereof, be fined up to $10,000 or imprisoned not more than 5 years, or both…”

Ms. Quinn argued that she should not face such prosecution because she had paid the trust fund taxes. The court did not see things Ms. Quinn’s way – and ruled she could still be prosecuted for willfully avoiding paying the payroll taxes. While the court was probably thankful that Ms. Quinn came into compliance and repaid her tax debt, she could not avoid prosecution by paying at the last minute.

Moral of the story: Make sure to set aside and pay all trust fund taxes on time. If you cannot – seek professional assistance immediately!

The IRS has reminded taxpayers about the steps they should take if they have not received their Form W-2, Wage and Tax Statement. Employers had until Jan. 31 to send employees a 2010 Form W-2 earnings statement.

The agency suggested four specific actions for taxpayers to take.

First, contact the employer to inquire if and when the W-2 was mailed. After making contact, allow a reasonable amount of time for the employer to resend or to issue the W-2.

Second, if the W-2 is not received by Feb. 14, contact IRS for assistance at (800) 829-1040.

Third, even if the taxpayer still has not received the Form W-2, a tax return or request for an extension to file must be filed by April 18. If the Form W-2 is not received by the due date, and the taxpayer has completed the previous steps, the taxpayer may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Form 4852 should be attached to the return, with an estimate of income and withholding taxes.

Finally, a taxpayer may have to file Form 1040X, Amended U.S. Individual Income Tax Return. If a missing W-2 is received after the return was filed using Form 4852 and the information is different from what was reported on the return, the return must be amended. Complete details can be found here.
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Our client tried making arrangements with the IRS and set up an installment payment plan. She tried to repay her debt in full, but she just didn’t make enough money. Now a single mom, she didn’t have the means to repay the tax debt she had incurred. Then, she came to JK Harris.

Our tax team analyzed her financial situation and determined she was a candidate for an Offer in Compromise. We prepared the Offer package and after several months of waiting to hear back from the IRS, when we did – the news was good. Ms. Capps had her offer in compromise accepted at a fraction of what she owed.

“I am very thankful to you,” Ms. Capps said in the letter she wrote to her case specialist.

We were glad to help – and wish you all the best in the future!