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"Dibble's Do's and Don'ts Tax Rules"
By Gerald W. Dibble, B.S., J.D., LL. M. (Tax)
(Web Version 042207a; Print (Version 18//E))
(PDF Copy)

 

Introduction. This tax information, in the form of rules, is not intended to help prepare tax returns or to do tax planning. Rather, this information is intended to provide information to aid in the defense against IRS and New York State tax audits, tax appeals, and tax enforcement or collection activities. Also, this tax information is intended to assist business owners to prepare for the possibility that they may owe taxes.

 

These "Dibble's Do's & Don'ts Tax Rules" are for informational purposes only and to assist you when you contact your professional tax advisor and are not legal advice or a substitute for legal counsel. Readers should not act upon, or use as legal advice, any of these "Dibble's Do's & Don'ts Tax Rules" without seeking professional tax advice. This information is not intended to create, and use of it does not constitute, an attorney-client relationship or the rendering of legal advice.

Table of Contents

 

Part I - Tax Records Retention

Part II - Government Tax Representative Contact

Part III - Individual Liability for Unpaid Sales or Withholding Taxes

Part IV - Criminal Tax Matters

Part V - Tax Collection and Enforcement

Part VI - Employer Identification Numbers

Part VII - Joint Tax Return Matters

Part VIII - What to Do About a Missing Form W-2 or Form 1099

Part IX - Tax Audit, Filing Tax Returns and Non-Filed Returns

Part X - Sub-Contractors

Part XI - Corporations and Business Matters

Part XII - Commons Tax Scams and Frivolous Arguments

Part XIII - Miscellaneous  


Definitions
 

In the rules below the following definitions apply:

  1. All references to a "sole proprietorship" also refer to a partnership.
  2. The term "EIN" means the Employer Identification Number issued by the IRS.
  3. The term "tax attorney" means a licensed attorney experienced in defending against tax audits, tax appeals, and tax enforcement or collection activities.
  4. The term "tax advisor" means any tax return preparer (for example, Certified Public Accountant (CPA), Enrolled Agent (EA), or a tax return preparer) experienced in tax law and in the preparation of tax returns.

Note that "tax advisor" also includes "tax attorney", because a "tax attorney" is able to provide all of the services that a "tax advisor" can provide.  

Part I - Tax Records Retention

 

  1. Federal Tax Returns Retention. Keep your Federal Income Tax and Payroll Tax Returns for at least ten (10) years.
  2. NYS Tax Returns Retention. Keep your New York State Sales, Payroll and Income Tax Returns forever.
  3. Tax Return Copies. When tax returns are copied, copy the actual return to be sent to the tax authorities, including the signature page after it has been signed by the taxpayer and the tax preparer, if any. Never rely upon a work or pencil copy of the return for your copy. Also, copy the envelope after it has been addressed and stamps have been placed upon it.
  4. Income and Expense Records Retention. Keep all records that show income. Businesses involved in cash sales where cash registers are used or sales receipts are given, like restaurants, need to keep receipts of each sale, e.g., each cash register sales receipt and daily cash register sales totals, as well as the customer sales-check used to request payment should be kept. Do not rely upon bank deposits to prove cash sales. Keep all personal records that show payments for expenses such as rent, utilities, medical, transportation, insurance, child support, maintenance and court orders. If these receipts are not given at the time of payment, they should be obtained.
  5. Records Surviving a Divorce. Frequently, important tax records get destroyed during a divorce by bitter spouses, foresight should be able to prevent this from happening.

Go to Table of Contents of "Rules"  

Part II - Government Tax Representative Contact

  1. Contact by Government Tax Representative - Record. Every time you are contacted by a government tax representative, whether in person or by telephone, obtain their full name (make the representative spell their name) and phone number, and keep a record of that information along with the date and time and your location (for example, your home, office, etc.) at the time of the contact.
  2. Contact by Government Tax Representative - Reporting. Every time you are contacted by a government tax representative, report that contact to your tax attorney, if you have retained one.
  3. Visit by a Government Tax Representative. Never allow a government tax representative into your home, unless they have a search warrant or some other legal authority to do so. If they come to your home to talk to you, meet them outside of your home, no matter what the weather.
  4. Speaking to a Government Tax Representative. After you sign a Power of Attorney authorizing a tax attorney to represent you, never speak to any representative of that tax authority and never respond to any questions that they ask. However, if you are contacted by one (a) obtain their name and phone number, (b) tell them the name of your tax attorney, and (c) ask them not to call you again but rather call your tax attorney.
  5. Receipt of Tax Mail. If you receive any mail from a tax authority, give a complete copy of the mail to your tax attorney, including all of the contents, the envelope (with the postmark intact) and any notices or statements about your rights contained in the envelope.
  6. Relationship with Government Tax Representative. Never threaten a government tax representative with physical harm. Never try to bribe a government tax representative. You may be firm about your tax position with a government tax representative, but never be discourteous. If you believe that the government tax representative was discourteous, abusive or unreasonable, contact his or her supervisor, or contact a tax attorney for help.
  7. Statements to a Government Tax Representative. Never tell an untruth to a government tax representative. Never give a form to a government tax representative that contains an untrue statement.
  8. Dishonest Tax Advisor. Never deal with, and promptly terminate, any tax advisor who advises you to tell an untruth to any government tax representative, or advises you to give a form to a government tax representative that contains an untrue statement or that contains false information about income or deductions. In both of these situations, an experienced tax attorney will have a better solution than to be untruthful.
  9. Appointments with Government Tax Representative. If you agree to call, or to do something for a government tax representative by a certain time, do not ignore the deadline. If you are unable to comply with the deadline, make contact with the government tax representative and obtain an extension of time to comply.
  10. Tax Records Requested by Government Tax Representative. Never voluntarily give original records to any tax authority. If they have the legal right to seize them, do not interfere with the seizure. If you give tax records to a government tax representative, always give them only copies.
  11. Request by Government Tax Representatives for Returns that Have Not Been Filed. If you have failed to timely file a tax return, and you have been contacted in person by a government tax representative who has requested that you file the original of that return with the tax representative, you should promptly prepare the return but do not file it electronically or give it to the tax representative. Instead, you should contact your tax attorney in order to determine if you are possibly involved in a criminal tax investigation, and, if not, if the original of the return should be given to the tax representative requesting the return or if a copy of the return should be given to the tax representative and the original of the return should be mailed to the appropriate government address where such returns are normally filed.
  12. IRS Form 433-A and NYS DTF-5 Completion. If you are asked to complete an IRS Form 433-A or a NYS Form DTF-5, do not complete them without the assistance of an experienced tax attorney unless you have no income, no assets and are being supported by another person or entity.
  13. Cash on Hand Statements. Never tell any government tax representative how much cash you had at any time that was not in a bank account or other financial institution without the advice of a tax attorney.

Go to Table of Contents of "Rules" 
 

Part III - Individual Liability for Unpaid Sales or Withholding Taxes

 

  1. Liability of Owners and Officers. Sales and Withholding Taxes (both NYS and IRS) are legally trust fund taxes, and as such, are both corporate and sole proprietorship liabilities, as the case may be, and are the liability of any individual responsible to collect or to pay over such taxes to the appropriate tax authority. If these taxes are not paid, individuals can be personally liable for these taxes, despite the existence of a corporation, if the individuals had the responsibility either to collect or to pay over any of these taxes to the tax authority. It makes no difference whether these individuals were officers, owners, shareholders or employees of the business.
  2. Contact an Attorney When There Are Unpaid Sales or Withholding Taxes. If you are an officer, owner, shareholder, member or employee with check signing authority or if you had any involvement with the collection, calculation and/or reporting of trust fund taxes and there are unpaid Sales or Withholding Taxes, immediately contact a tax attorney, because you may be held personally liable for these taxes even if you do not sign any checks.
  3. Beware of Obtaining Check Signing Privileges. If you work for a business, never agree to sign checks for the business unless you know that all Sales and Withholding Taxes are paid, and will paid in the future, because you may be held personally liable for these taxes.
  4. Check Signing When There Are Unpaid Sales or Withholding Taxes. If you work for a business and have check signing authority, (a) never pay any bills if you know that there are unpaid Sales or Withholding Taxes until these taxes are first paid, because you may be held personally liable for these taxes if you pay these bills, and (b) you should surrender your authority to sign checks if there are unpaid Sales or Withholding Taxes for two pay periods.
  5. Beware of Signing Sales or Payroll Tax Returns.  Unless you are required by law to sign a sales or payroll tax return as preparer or responsible person of an entity, you should never sign sales or payroll tax returns without the advice of a tax attorney.
  6. Purchase of a Business with Unpaid Sales or Withholding Taxes. Never purchase a business with unpaid Sales or Withholding Taxes or against which an IRS or NYS Tax Lien has been filed, without the advice of a tax attorney, because you may be held personally liable for these taxes.
  7. Spouse Liability. Spouses should never be a signor on the checking account of a new business, until it is established beyond doubt that the business will be able to pay all of its tax obligations when they become due. The spouse of the owner of a business that is not timely paying Sales or Withholding Taxes must never be a signatory on a checking account.

Go to Table of Contents of "Rules"

Part IV - Criminal Tax Matters

 

  1. Use of a Tax Attorney during a Criminal Audit. Always consult with a tax attorney during a criminal audit or a suspected criminal audit.
  2. Criminal Audits and the Use of a Tax Advisor. Never use, or consult with, an accountant, Certified Public Accountant (CPA), or Enrolled Agent (EA), during a criminal audit or a suspected criminal audit, without the advice of a tax attorney.
  3. Statements to Accountants about Income or Deductions. Never tell an accountant that you under-reported income or over-reported tax deductions or expenses on a filed tax return. Make these statements only to a tax attorney, with whom such confidential communications are privileged. There is no similar accountant-client privilege involving criminal matters.

Go to Table of Contents of "Rules"

Part V - Tax Collection and Enforcement
 

  1. Bank Accounts Can be Seized Even after Checks Have Been Written. If you owe taxes, your bank account can be seized by the tax authority. If you write a check, the money remains in the account until the check has "cleared" the account, which could take a week or more. As a result, if you write a check and the account is seized within several days thereafter, it is likely that the check has not "cleared" your account and it will "bounce" (be returned because of insufficient funds).
  2. Bank Account and Social Security Number. Never use the Social Security Number on a bank account of a person who owes taxes, even if the funds in the account do not belong to the person who owes the taxes.
  3. Property in the Name of Person Who Owes Taxes. Never put property into the name of a person who owes taxes.  Also, if you owe taxes, do not transfer property to another person or entity without the advice of a tax attorney, because that person or entity could be held responsible for your tax debt.
  4. Tax Investigations for Assets. Government tax investigators routinely search public records for assets of people and entities that owe taxes.
  5. Pyramiding. Never pyramid. Pyramiding is the failure to pay taxes that are currently due while negotiating to resolve past due taxes with a tax authority.
  6. Payment of Current and Past Due Taxes. Always pay taxes that are currently due before paying past-due taxes. Contact a tax attorney before paying past-due taxes, unless you have a written payment agreement with the tax authority covering all the taxes that are past due and you can pay the past due taxes over the time period covered by the agreement without creating financial hardship and without falling behind on new taxes as they become due.
  7. How to Pay Taxes. All payments to a taxing authority should be by check or money order (never cash) and must contain (a) the taxpayer's Social Security Number if the payment is for taxes owed personally or the taxpayer's EIN (that is, Employer Identification Number) if the payment is for taxes owed by an entity (for example, trust, sole proprietorship, corporation, partnership, limited Liability company (LLC), etc.); (b) the tax form number being paid; and (c) the tax period being paid.
  8. Tax Compliance. Never become non-tax compliant after you enter into a payment plan, or obtain an Offer In Compromise, with a tax authority.
  9. IRS Form 900 Signing. Never sign an IRS Form 900 (Tax Collection Waiver) without the advice of a tax attorney.
  10. IRS Form 4180 Completion and Questions about Your Duties at a Corporation when Withholding Taxes are Not Paid. This form is used to determine if an individual may be liable for the payment of IRS Withholding Taxes. If you work for a corporation, or a sole proprietorship, you should never complete this form, or answer any questions about your activities in the corporation, or the sole proprietorship, asked by an IRS Revenue Officer attempting to collect IRS Withholding Taxes, without the assistance of a tax attorney.

If you are asked questions about which person at a corporation, or sole proprietorship, hires or fires employees, orders supplies, pays bills, signs checks, etc. by an IRS Revenue Officer attempting to collect IRS Withholding Taxes, these questions should not be answered without the advice of a tax attorney because improper answers to some or all of these questions could make a person personally liable for the non-payment of IRS Withholding Taxes even though that person did not own or control any part of the corporation or the sole proprietorship.

  1. Sub S Corporation.  If you owe any kind of taxes, and you (a) are being pursued by a tax authority for the payment of these taxes, (b)are unable to pay these taxes, (c) are a shareholder in a Sub S Corporation, and (d) work for the Sub S Corporation in which you are a shareholder, you should seek the advice of a tax attorney before you answer any questions from, or before you complete any forms requested to be completed by, the tax authority attempting to collect these taxes. 

  1. IRS Taxes Not Owed or IRS Collection Procedure Improper.  If you receive any of the following notices from the IRS, and if you do not owe the taxes sought by the IRS, or if the method of tax collection is improper, timely file IRS Form 12135 (Request for a Collection Due Process Hearing) and request a hearing.  Each of the following notices will contain the procedure (CDP Notice) to follow:
    1. Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing. 
    2. Notice of Federal Tax Lien Filing & Your Right To A Hearing Under IRC 6320.
    3. Notice of Jeopardy, Levy and Right to Appeal.

If you do not know if you owe the taxes, or if you do not know if the method of tax collection is proper, you should seek the advice of a tax attorney. You should also seek the advice of a tax attorney about the proper way to complete the form. Valuable rights may be lost if the form is completed improperly or is not filed timely.

Go to Table of Contents of "Rules"

 

Part VI - Employer Identification Numbers
 

  1. EIN for Sole Proprietorship or a Corporation. Every sole proprietorship (also known as a "d/b/a") and every corporation should have its own EIN. Never use a Social Security Number as an identification number for a sole proprietorship or a corporation.
  2. EIN of Sole Proprietorship that Becomes a Corporation. Never use the EIN of a sole proprietorship for the EIN of a corporation, even if the corporation was formed to take over the business of the sole proprietorship.
  3. EIN Must Only Apply to One Entity. Never use an EIN for more than one entity.

Go to Table of Contents of "Rules"

 

Part VII - Joint Tax Return Matters

  1. Joint Tax Returns - Unreported Income. Always consult a tax adviser before filing a joint tax return with a spouse that may have unreported income, and consider filing a separate return.
  2. Joint Tax Returns - Illegal Income. Never file a joint tax return with a spouse who has unreported illegal income (for example, gambling or drug income) or legal income that is not being reported on the return.
  3. Joint Tax Returns - Unpaid Taxes. Always consult a tax advisor before filing a joint tax return with a spouse when the return shows taxes are not paid, and consider filing a separate return, unless payment in "good funds" is being made with the return.
  4. Location of Names on Joint Returns. If a joint return was filed with your name first on the return and your spouse's name second (or your name second and your spouse's name first), when later a return is filed never switch the order of the names on the return, for any reason, even if the spouse whose name was first on the return earns less income than the other spouse, or retires or becomes unemployed.

 

Go to Table of Contents of "Rules"

 

Part VIII - What to Do about a Missing Form W-2 or Form 1099

  1. Employers Must Provide IRS Form W-2. Employers must provide employees with a Form W-2, Wage and Tax Statement, by January 31, of the year following the year in which the wages were earned. If an employee is missing a From W-2, the employee should contact the employer to find out if and when the Form W-2 was mailed. If the Form W-2 was returned because of a problem with the address or if the Form W-2 has not yet been issued, the employee should allow a reasonable amount of time for the employer to re-mail or issue the Form W-2.

  2. Failure of Employee to Receive an IRS Form W-2. If the employee has not received the Form W-2 by February 15, of the year following the year in which the wages were earned, the employee should call the IRS at 1-800-829-1040 and provide the following information:
  1. The employer’s name and complete address, including zip code, the employer’s identification number (if known), and telephone number;

  2. The taxpayer’s name and address, including zip code, social security number, and telephone number; and

  3. An estimate of the wages the taxpayer earned, the federal income tax withheld, and the dates the taxpayer began and ended employment.
  1. Employee Misplaces IRS Form W-2. If the employee misplaced the Form W-2, he or she should contact the employer and provide the information listed above. The employer can replace the lost form with a “reissued statement.”
  1. Employers are allowed to charge a fee for providing the taxpayer with a new W-2.
  1. Employee Leaves the Job Before the End of the Year. If an employee leaves a job before the end of the year and requests a Form W-2, the employer must provide the Form W-2 within 30 days of the request.

  2. Must File Return Even if Do Not Have IRS Form W-2 and Must Use IRS Form 4852. A missing Form W-2 does not excuse the employee from filing a tax return on time. In that case, Form 4852, Substitute for Form W-2, Wage and Tax Statement, may be used in place of a missing Form W-2.

    1. Form 4852 should only be used if the employee cannot get a Form W-2 by the tax filing deadline.

    2. If a taxpayer files a return and attaches Form 4852 instead of Form W-2, the refund, if any, may be delayed while the IRS verifies the information.

    3. If the taxpayer receives a corrected Form W-2 after a return is filed and the information it contains does not match the income or withheld tax reported on the return, the taxpayer should file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

  3. Use of IRS Form 1099. Taxpayers receiving certain types of income other than wages may receive a Form 1099.
  1. Form 1099 should be received by January 31, of the year following the year in which the income was earned.

  2. If the taxpayer has not received an expected Form 1099, the taxpayer should contact the payer. If the taxpayer still does not get the form by February 15, of the year following the year in which the income was earned, the taxpayer should call the IRS at 1-800-829-1040.
  1. When Can a Taxpayer File a Return When No IRS Form 1099 Has Been Received. In some cases, taxpayers may obtain the information that would be on the Form 1099 from other sources. For example, banks may put summaries of the interest paid during the year on the December or January bank statements. Taxpayers who can obtain accurate information needed to complete tax returns do not have to wait for Forms 1099 to arrive.

  2. Taxpayer Should File IRS Form 1040X after File Return if Receive IRS Form 1099 Listing Income Not Reported on the Return. If a taxpayer files a tax return and later receives a Form 1099 for income that was not fully included on that return, the taxpayer should report the income and take credit for any income tax withheld by filing Form 1040X.

Go to Table of Contents of "Rules"

 

Part IX - Tax Audit, Filing Tax Returns and Non-Filed Returns


  1. Tax Audit Settlements - Filed Returns. At the termination of an IRS tax audit, never sign IRS Form 4549 (or CG 4549) without the advice of a tax advisor.
  2. Tax Audit Settlements - Non-Filed Returns. After termination of an IRS audit for a tax period for which an income tax return was not filed, never sign IRS Form 4549 (or CG 4549), without the advice of a tax attorney.
  3. The Filing of Late Tax Returns. Tax returns that are filed past their due date should never be prepared by the taxpayer, but rather only by a tax advisor.
  4. The Timely Filing of Tax Returns and Advice Not to Timely File. Tax Returns should be filed timely. Tax advisors should not advise anyone not to file a tax return by the due date even if the tax cannot be paid in whole or in part; except, under certain circumstances. A tax attorney may advise that a tax return not be filed timely during a criminal tax investigation.
  5. Filing of Tax Returns and Maintaining Copies. If tax returns are mailed, they should only be mailed certified mail, return receipt requested. Make sure that you copy the envelope, in which the return was mailed, after it has been addressed and stamps have been placed upon it. Make sure that you keep a copy of the entire tax return, including all schedules and attachments. Finally, make sure that you copy the signature page of the return after it has been signed by you and the return preparer, if any.

Go to Table of Contents of "Rules"

 

Part X - Sub-Contractors


  1. Sub-Contractors and Employees - Designation. (a) The law defines whether a worker is a sub-contractor or an employee. (b) Sub-contractors receive IRS Form 1099 and have no taxes withheld. Employees receive IRS Form W-2 and must have taxes withheld. (c) Employees are covered by Workers' Compensation Insurance, sub-contractors are supposed to carry their own insurance. (d) An employer cannot designate a worker as a sub-contractor if the law designates the worker as an employee. (e) Designating a worker as a sub-contractor when the worker is employee results in personal liability for employee taxes and Workers' Compensation Insurance, and liability for the injuries of an injured worker.
  2. Sub-Contractors and Employees - Workers' Compensation Insurance. Every employer of employees or sub-contractors must make sure that there is Workers' Compensation Insurance covering the employees of the employer and the employees of the sub-contractor. No sub-contractor should be used by a business unless that sub-contractor has Workers' Compensation Insurance in place which is non-cancelable without 30 days notice to the employer.

Go to Table of Contents of "Rules"

 

Part XI - Corporations and Business Matters


  1. Maintaining Liability Protection of a Corporation. (a) In order to maintain the liability protections provided by a corporation, the business of the corporation must be conducted at all times using the full and correct corporate name, so that individuals and entities who obtain the services or products from the corporation and vendors who sell to the corporation know that they are dealing with a corporation. This can be done by having business cards, stationary, invoices (bills) and all bank accounts with the name of the corporation on them. Never use the corporate name without using the full name of the corporation, which must contain one of the following suffixes: Inc., Incorporated, Corp., Corporation, Ltd. or Limited.
  2. Corporation and Sole Proprietorship with the Same Name. Always immediately dissolve a sole proprietorship (also known as a "d/b/a"), the business of which was incorporated. Never own a sole proprietorship with the same name as a corporation.
  3. EIN of Sole Proprietorship that Becomes a Corporation. Never use the EIN of a sole proprietorship for the EIN of a corporation, even if the corporation was formed to take over the business of the sole proprietorship.
  4. EIN for a Corporation. Every corporation should have its own EIN. Never use a Social Security Number as an identification number for a corporation.
  5. Documents without the Corporate Designation. (a) Never sign a document pertaining to the affairs of the corporation, including corporate checks, which contain the name of the corporation without the appropriate corporate designation suffix, that is: Inc., Incorporated, Corp., Corporation, Ltd. or Limited. (b) If any invoice is received by the corporation without the proper corporate name, and the appropriate corporate designation suffix, that is; Inc., Incorporated, Corp., Corporation, Ltd. or Limited, you must require that the records of the sender be corrected to reflect the proper corporate name, including the appropriate corporate designation suffix.
  6. Signing Corporate Documents. Never sign a document pertaining to the affairs of the corporation, including any corporate check, without placing a title after your name, for example, President, Vice President, Secretary or Treasure. For other acceptable titles, contact your attorney.

Go to Table of Contents of "Rules"

 

Part XII - Common Tax Scams and Frivolous Arguments

(The Following is an Edited Summary of Tax Scams Reported by the IRS)

  1. Common Tax Scams. As technology grows and information becomes more accessible, tax scams are becoming more common.  To help combat new and old tax scams, the IRS publishes an annual list of “Dirty Dozen Tax Scams”.

  2. Falsely Claiming Zero Wages. A taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows zero or little wages or other income. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer.

    1. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and 3121" or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a “Zero Return.” (See immediately below.)

  3. Zero Return. The taxpayer enters all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

  4. False/Inflated Income and Expenses. A taxpayer includes income that was never earned, either as wages or as self-employment income in order to maximize refundable credits.

    1. Additionally, some taxpayers file excessive claims for fuel tax credit.  Taxpayers claiming the tax credit when they are not eligible could constitute fraud and be subject to a frivolous tax claim penalty of $5,000.

  5. False Form 1099 Refund Claims. Some taxpayers fall victim to schemes involving refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to those accounts by issuing 1099-OID forms to the IRS. In this scheme, a taxpayer files a fake information return, such as a Form 1099-OID, to justify a false refund claim on a corresponding tax return.

  6. “Free Money” from the IRS & Tax Scams Involving Social Security. Taxpayers, relying on flyers and advertisement for free money from the IRS, have been filing tax returns, expecting refunds, even though many of these taxpayers to not even meet the tax filing requirement.

    1. Scammers often prey on low income individuals and the elderly through community organizations with bogus promises of free money.  Scammers build false hopes and charge good money, and when the taxpayer learns of the bad advice, the scammers are long gone.

    2. Scammers often also focus on Social Security tax scams.  Scammers sometimes lure the unsuspecting with promises of non-existent Social Security refunds or rebates.  Even when a taxpayer is due a credit or refund, the scammer may use inflated information to complete the return.

  7. IRS Form 843 Tax Abatement. The taxpayer, relying upon a faulty interpretation of the Internal Revenue Code, requests abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: "Failed to properly compute and/or calculate IRC Sec 83––Property Transferred in Connection with Performance of Service."

  8. Phishing. Phishing is a technique used by identity thieves to acquire personal and financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards, apply for new loans in their names, or file false tax returns to obtain a taxpayer’s refund. These Internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information.

    1. Sometimes scammers pose as the IRS itself. Some taxpayers have received e-mails that appear to come from the IRS. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web Site. The Web Site then solicits a social security and credit card number.

    2. In a variation of this scheme, criminals have used e-mail to announce to unsuspecting taxpayers they are “under audit” and could make things right by divulging selected private financial information.

    3. Taxpayers should take note: The IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts.

  9. Misuse of Trusts. Unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other similar arrangements, taxpayers should seek the advice of a tax attorney before entering into a trust.

  10. Frivolous Arguments. Promoters have been known to make claims that individuals are not required to pay income taxes or are not required to file income tax returns. These claims are sometimes based on the following arguments: The Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. There is no reliable legal support for these arguments sufficient to allow a taxpayer to not file a return and to not pay taxes according to the Internal Revenue Code. A Taxpayer has the right to contest their tax liabilities in court, but, before a taxpayer relies upon any of these arguments, the taxpayer should consult with a tax attorney. A wrong decision in this regard could result in the assessment of significant interest and penalties.

    1. With respect to those arguments that the IRS considers frivolous, the IRS has published a list of such arguments along with the position of the IRS with respect to such arguments. These publications include:

      1. The following three publications were issued as part of another publication entitled: "TheThe Truth About Frivolous Tax Arguments" (which also contains a list applicable IRS Revenue Rulings).

        1. "The Truth About Frivolous Arguments – Section I".

        2. "Frivolous Arguments In Collection Due Process Cases – Section II".

        3. “Penalties For Pursuing Frivolous Tax Arguments – Section III”.

      2. The IRS has a publication, IRS Publication 2105, in which arguments deemed frivolous by the IRS are summarized.

      3. If any of these IRS publications are to be relied upon, then the IRS Web Site should be checked for the current version.

  11. Return Preparer Fraud. Dishonest return preparers can cause many problems for taxpayers who fall victim to their schemes. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, “If it sounds too good to be true, it probably is.” This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). And remember, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy.

  12. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS can revoke the tax-exempt status of credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

  13. Impersonation of Charitable Organizations. Some taxpayers become victims of scams following natural disasters.  In the wake of natural disasters, scammers often solicit money or financial information from contributors under the guise of bogus charities.  Sometimes, scammers will even call disaster victims, claiming to be working for the IRS or charitable organizations, to obtain personal financial information or Social Security numbers, claiming to be filing a casualty loss claim and get tax refunds.

  14. Abuse of Charitable Organizations and Deductions. There is an increased use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity.

    1. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.

  15. Hiding Income Offshore. Some taxpayers continue to try to avoid U.S. taxes by illegally hiding income in offshore banks and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so.

  16. Employment Tax Evasion. There are illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is often based on an incorrect interpretation of Internal Revenue Code § 861 and other parts of the tax law and has been refuted in court.

    1. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest.

    2. Employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

  17. "No Gain” Deduction. Taxpayers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The taxpayer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return that refers to court documents and includes the words “No Gain Realized".

  18. "Claim of Right" Doctrine. A taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter advises the taxpayer to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered.” This so-called deduction is often based on a misinterpretation of the Internal Revenue Code and has no basis in law.

  19. Corporate Sole. Participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit, religious organization.

    1. When used as intended, Corporation Sole statutes enable religious leaders to separate themselves legally from the control and ownership of church assets. But the rules have been twisted at seminars where taxpayers are charged fees of $1,000 or more and incorrectly told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts.

  20. Disguised Corporate Ownership. A taxpayer improperly uses third parties to request employer identification numbers and form corporations that obscure the true ownership of a business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes.

  21. Abusive Tax Structures.  Some taxpayers structure abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.  Some taxpayers violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes.  These taxpayers may use Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  These taxpayers may use schemes that are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.  IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes, focusing on promoters, facilitators, and investors of these schemes.  The IRS encourages taxpayers to report unlawful tax evasion.  Where Do You Report Suspected Tax Fraud Activity?

  22. Pervasive Telephone Scams.  Taxpayers have been the victims of recent increases in local phone scams across the country, with fraudulent callers pretending to be from the IRS in hopes of stealing money or identities from victims.  Some taxpayers are told that they owe money or are entitled to a huge refund.  Taxpayers are threatened with arrest or with the revocation of the taxpayer’s driver license.  Sometimes, taxpayers even receive a fake follow-up call from people purporting to be from the local police department or the state motor vehicle department.  If you receive a phone call from someone claiming to be from the IRS, call the IRS at (800) 829-1040, and the IRS can confirm whether or not the call was legitimate or if money is really owed.  Do not give any information, until you have confirmed the legitimacy of the call.  If you know that you don’t owe taxes or find out that you have been a target of these scams, you can also report the incident to both the Treasury Inspector General for Tax Administration at (800) 366-4484 and the Federal Trade Commission using the “FTC Complaint Assistant” at FTC.gov.  Characteristics of these scams can include:

    1. Taxpayers are given fake names and IRS badge numbers.  The fake names are often common names and surnames.

    2. Taxpayers are provided with the last four (4) digits of their Social Security Numbers.

    3. Taxpayers see the actual IRS number on the taxpayer’s caller ID, which makes it appear that the IRS is actually calling.

    4. Taxpayers receive bogus emails purporting to be from the IRS to support scam calls.

    5. Taxpayers hear background noise of other calls being conducted to mimic a call site.

    6. Taxpayers are threatened with arrest for owing taxes.  The IRS or state tax authority will never threaten a person with arrest for owing taxes on an initial phone call.

  23. Identity Theft. It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. There are several identity theft scams involving taxes.

    1. In one case, fraudsters sent bank customers fictitious correspondence and IRS forms in an attempt to trick them into disclosing their personal financial data.

    2. In another, abusive tax preparers used clients’ Social Security numbers and other information to file false tax returns without the clients’ knowledge.

    3. Sometimes scammers pose as the IRS itself. In this regard, there is a scheme in which perpetrators used e-mail to announce to unsuspecting taxpayers that they were “under audit” and could set matters right by divulging sensitive financial information on an official-looking Web site.

    4. Taxpayers should note the IRS does not use e-mail to contact them about issues related to their accounts.

Go to Table of Contents of "Rules"

 

Part XIII - Miscellaneous

  1. Preparation of Payroll Checks by a Payroll Service Company. It is highly recommended that a reputable payroll service company be used to prepare payroll checks, payroll tax returns, and to make Federal Tax Deposits.
  2. Payment of Employee Taxes. Due to the complexity of the rules surrounding Federal Tax Deposits, it is recommended that a reputable payroll service provider be engaged to handle such deposits.  In this regard, it is recommended that an entity open a separate bank account for payroll tax to pay Federal Tax Deposits instead of using the operating account.  If you chose not to hire a payroll company, the IRS has a free service called Electronic Federal Tax Payment System (EFTPS), which may be used in order to make your Federal Tax Deposits.  Forms 8109, Federal Tax Deposit Coupon, and 8109-B can no longer be used to make Federal Tax Deposits.
  3. Tax Returns Used to Obtain Credit. Never give or show a tax return for the purpose of obtaining credit unless it was filed with the appropriate tax authority, or will be filed with the appropriate tax authority either timely or before the credit is approved.
  4. Tax Payments in Cash. Never give cash to a third party to pay your taxes.
  5. Delivery of Records to Your Tax Attorney. Make sure that all records delivered to your tax attorney are complete. Make sure that you (a) copy the back of two-sided documents, (b) deliver the envelope and all of the contents of all government mailings, including any government notices or statements about your rights contained in the envelope, (c) copy the entire document, including text to all edges, and check to make sure that all text has been copied, (d) copy the documents pertaining to the appropriate tax period, and (e) give a copy of every page of a bank statement (not just the summary page) if bank statements are requested.
  6. Current Address and Telephone Number. Always make sure that your tax advisor has your current address and telephone numbers.
  7. Bank Seizure of Bank Accounts. Never leave money in a bank account of a bank to which you owe money and are not paying timely, because the bank may have an automatic right to take the money out of your account in order to satisfy your debt owed to the bank.
  8. Filing for Protection under the Bankruptcy Laws. Most income taxes, after a time period fixed by law, are dischargeable in Bankruptcy. For this reason, never file for protection under the Bankruptcy Laws until you have obtained a legal opinion as to whether you owe any Federal or state income taxes. If you do owe Federal or state income taxes, you should also obtain a legal opinion as to when the income taxes will become dischargeable, and when a Bankruptcy filing is appropriate in order to discharge the taxes that can then be discharged. If the income taxes will not be able to be discharged in Bankruptcy, the legal opinion should state the reason why the income taxes cannot be so discharged.

Go to Table of Contents of "Rules"

IRS Required Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service (IRS), we inform you that any tax advice contained in this Web Site (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the US Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

These "Dibble's Do's & Don'ts Tax Rules" are for informational purposes only and to assist you when you contact your professional tax advisor and are not legal advice or a substitute for legal counsel. Readers should not act upon, or use as legal advice, any of these "Dibble's Do's & Don'ts Tax Rules" without seeking professional tax advice. This information is not intended to create, and use of it does not constitute, an attorney-client relationship or the rendering of legal advice.

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