Former Wesley Snipes Tax Advisor Sentenced to Prison

By JK Harris

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.

Be Aware – IRS Lists 2010 “Dirty Dozen” Tax Scams

(Information taken from IRS release number IR-2010-032)

Periodically, the IRS releases its “Dirty Dozen” scams for taxpayers to be aware of – this year’s list includes phishing, tax return preparer fraud and hiding income offshore. These types of tax scams are illegal and generally lead to fines and/or imprisonment for the scam artist. What you may not be aware of is that the taxpayer can be held liable as well. If a taxpayer is fooled into one of these schemes, he or she will have to pay any unpaid taxes, interest, and penalties.

The IRS warns all taxpayers to watch out for the following schemes and scams:

* Return preparer fraud – Not all tax preparers are honest. There are preparers who pad tax returns, overcharge for services and promise large tax refunds in order to attract new clients. Taxpayers must choose their return preparers carefully. The IRS is increasing its vigilance against dishonest preparers by having all tax preparers register with the IRS and obtain a preparer tax identification number (PTIN) as well as having them take competency tests. Continuing education will also be added to the requirements for tax preparers, except for attorneys, CPAs and enrolled agents (who already have their own criteria for education to meet each year).

* Hiding Income Offshore – Hiding of offshore income was highlighted in the news in 2009, in part due to the amnesty program the IRS offered to those who had been hiding assets offshore. The IRS aggressively pursues anyone involved in offshore transactions intended to hide income offshore.

* Phishing – This tactic is used by scammers to try to trick unsuspecting taxpayers into sending personal or financial information through email or other online means. These scammers have used emails, tweets (via Twitter) or phony websites to attempt to get this sensitive information from taxpayers.

* Filing false or misleading forms – The IRS is seeing a rise in the number of filers filing forms and seeking refunds for credits they are not entitled to.

* Nontaxable Social Security Benefits with Exaggerated Withholding Credit – The IRS is seeing a trend in filers reporting nontaxable Social Security benefits with excessive withholding. The scammer then lists no income on the tax return. Taxpayers should avoid making this mistake as it could cost them a $5,000 penalty.

* Abuse of Charitable Organizations and Deductions – Abuse or misuse of tax-exempt organizations continues to be a problem. Abuses include shield income and assets from taxation and attempts by donors to maintain control over donated goods and property.

* Frivolous Arguments – Scammers promote frivolous tax arguments to encourage taxpayers to make ridiculous claims to avoid paying the taxes they owe. Just remember, what seems too good to be true, often is. The IRS maintains a list of frivolous legal positions tax protesters have tried to use – all false and all have been thrown out of court.

* Abusive Retirement Plans – Be aware of any financial adviser who advises any transaction that skirts the limits on IRA contributions. Other problems include advisers who encourage investors to shift appreciated assets at less than fair market value into IRAs to circumvent the annual contribution limits.

* Disguised Corporate Ownership – Some corporations have been formed for the purpose of disguising ownership of the business or financial activity. These entities are then used for underreporting income, filing fictitious deductions, non-filing of tax returns, money laundering, financial crimes and even for terrorist financing. The IRS is working closely with state authorities to identify these entities and bring them to justice.

* Zero Wages – Filing phony wage related information or submitting a “corrected” W-2 with lowered wages is one way scammers have attempted to reduce taxable income to zero.

* Misuse of Trusts – One scam that has been going on for years is the misuse of trusts. Corrupt promoters have told taxpayers to transfer assets into trusts, promising reduction of the amount of income subject to tax, deductions for personal expenses, and reduced estate and gift taxes.

* Fuel Tax Credit Scams – The IRS has seen an upswing in excessive deductions for the fuel tax credit. Taxpayers are claiming the credit when the credit does not apply to them. Fraud involving this credit is also subject to the $5,000 penalty for a frivolous tax claim.

Do you suspect someone of committing tax fraud? The IRS offers a Whistleblower’s reward. More information is available on the IRS’ website or in Notice 2008-4. Don’t be caught off guard. If your tax preparer sounds too good to be true, chances are they might be.