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July 2002 Hot Topics
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Is IRS Losing the Battle Against Tax Cheats?

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Introduction
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The "tax evasion business is booming" and U.S. documentation proves that little has been done to stop the nefarious schemes rampant among Americans filing bogus returns. This, according to an article in the San Francisco Chronicle (Wednesday, May 22, 2002) by David Cay Johnston. Some claim not only that they owe no taxes, but they are actually seeking money from the government under a variety of devises touted by scam promoters. Those that unashamedly misuse the system are somehow off the IRS radar-screen, yet ordinary, law-abiding taxpayers, often those of meager income, are hounded by aggressive tax collectors in the agency.


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Look Who's Involved and What They are Claiming

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Allegedly, Wesley Snipes is one of 152,000 Americans engaged in phony tax shelter schemes. Although Mr. Snipes makes millions as an actor in Hollywood, he evidently believes his income is "foreign" to the U.S. tax system. Equally disturbing, IRS claims to have identified 1,500 businesses that no longer withhold deductions from employees' wages while others do not file corporate returns at all or claim zero income. A parade of U.S. companies are reincorporating in tax havens such as Bermuda; all in an effort to cut tax bills. Yet these same individuals and corporations, who exist under the protection and prosperity of the United States, apparently do not feel responsible for sharing the costs inherent in providing their advantages. According to documents filed in U.S. District Court in Tampa FL the Justice Department is clamping down on a myriad of tax evasion schemes involving hundreds of thousands of businesses and individuals alike. The schemes include the claim that under the tax code, most income earned is foreign and not taxable by the United States, that African-American taxpayers are due a tremendous slavery reparations tax credit of more than $40,000, and that businesses do not have to withhold taxes from employees' paychecks.


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IRS Knocked Off Balance

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The proliferation of tax cheats is said to be tied to the IRS reform and restructuring act of 1998 which constrains IRS abuses against ordinary taxpayers. These protections are used as a shield by unscrupulous tax promoters, believing that they are "untouchable" by IRS. Remarkably, after detection by IRS, many promoters still continue their tax-scam strategies, even after having had suit filed against them. Emboldened by the sheer number of potential tax-evaders, they advertise through brochures, lectures, radio, newsletters and on the Internet, ever broadening their reach into private and corporate America. But the Justice Department warns that it will use these very communication devices to find and shut promoters down. As the Justice Department begins its crackdown on scam artists, the true extent of their illegal activities will become public knowledge. It seems both IRS and the Justice Department have been caught off-guard as to the magnitude of those taxpayers who are gaining on the system.


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Wesley Snipes and His Tax Preparer

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Recently the government sought an injunction to refrain Douglas P. Rosile, Sr. of Venice, FL from filing false tax returns for clients. He previously had his accountant license revoked in both Ohio and Florida and was barred for life by the Securities and Exchange Commission for preparing false financial statements. More than 174 known clients sought to evade an estimated $29 million in federal income taxes; federal prosecutors said the numbers could be much higher. In addition to charging $100 per amended tax return, Rosalie also received 20 percent of any refunds his clients received - which takes us back to Mr. Snipes. Snipes' amended 1997 income tax return, prepared by Rosile, listed zero income for the year - despite the $19.3 million that Snipes had originally reported. In fact, according to this amended return, Snipes was due a refund of $7.4 million! For this single client, Rosile stood to collect $1.5 million. These scam artists promote various theories to support their bogus claims - the 861 position (used in the Snipes matter) states that one does not owe taxes if they work for an American company. The federal courts have repeatedly found that the 861 position is frivolous. Other claims include that income taxes are voluntary; that no definition of the word "income" exists so that anyone can report zero income; that only foreign-owned corporations are taxable.


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IRS Stops a Tax Scam Kingpin

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Another sham promoter is Rex E. Black of Beecher, Illinois. Black has used affiliated organizations to promote his fraudulent trust strategies to avoid paying taxes. Some have such exalted titles as The National Council of Certified Estate Planners and the Association for Certified Estate Planning Attorneys. These organizations ostensibly transfer income and assets to trusts. In reality they attempt to thwart federal tax laws and in the process assist customers in the commission of a crime. A federal court in Chicago barred Black from selling his fraudulent trust plans and directed him to post the injunction on his internet sites. Eileen J. O'Connor, Assistant Attorney General for the Department's Tax Division warns people to be on guard, ". . . substantial civil and criminal sanctions may be imposed on those who participate in abusive schemes, and we will continue to pursue promoters who sell them." Black's "Liberty Institute" has reportedly trained over 2,500 people nationwide through "certification" courses that bestow a "Certified Estate Planner" designation on participants. These "Planners" sell trust packages to the public for fees as high as $3,750 plus additional charges for preparation of "tax returns, 'trustee services', and secretarial work." According to IRS estimates, Black's activities have cost taxpayers more than $9 million per year.


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Conclusion

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Americans need to resist these scam artists and their bogus claims so that they avoid expending useless time and dollars chasing schemes that have no basis in reality. Worse, many of those who buy into the tax-scam rhetoric will wind up broke, in jail or both. Remember the old adage, "If it sounds too good to be true, it probably is."


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1995-2004 Robert L. Sommers, attorney-at-law, all rights reserved. This article and internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.