Tax Schemes and Tax Turkeys: Stay Away from Too-Good-to-Be-True Tax Advice

Several years ago, an attorney asked me to handle an IRS audit of a trust for one of his clients. His explanation of the trust was confusing at first (and I’m a tax professional!), but I finally understood it. The trust was brilliant in that it saved the client on taxes, but it was practically criminal as far as financial advice goes.

The IRS auditor stayed with me for months. We finally ended up with no taxes assessed. Whew!

Why “whew”? Several months after the audit was over, I saw misuse of trusts on the IRS’s list of questionable tax schemes. That left me a bit shaken. I never want to give my clients anything but the best (and completely legal) advice.

What kinds of tax advice do you want to avoid these days?

Fund your business with tax-free money from your IRA. If you’ve investigated buying a franchise or starting your own business, you may have been told that you can draw money from your IRA to fund your costs without paying taxes on it. Imagine: $250,000, all tax-free!

Not so fast. The IRS has a term for this: ROBS! Rollovers as business start-ups have been investigated by the IRS. Generally, ROBS are disqualified, and the taxpayer (that’s you) is assessed all the taxes, plus penalties, plus interest, plus negligence penalties, plus interest. And one promoter of this scheme was sent to jail.

Transfer your assets to a religious organization. We usually think of charities and religious institutions as being noble. In fact, they can be a good, viable business alternative. However, there are people who promote transferring your assets to your “church” to avoid taxation. You don’t need me to tell you this is nonsense. Read what the IRS says on the subject.

Fight your taxes as being not legal. Isn’t this tempting when you feel overburdened by the weight of your tax bill? I once had the privilege of interviewing an IRS district director for a column I wrote. He showed me some of the citations that people in the community had used and how irrelevant they were. The IRS got weary of fighting battles with the constant stream of tax protestors. Congress passed tougher penalties, including criminal penalties. Now that the IRS’s prosecution has teeth, it has produced an eighty-three-page “treatise” on frivolous tax arguments. This could be fun reading.

I know of only one protestor who ever won a battle with the IRS. (Yes, there was one!) However, he didn’t win on the issue of the legality of the law. He won on a technicality related to the IRS’s enforcement procedure in his case.

Have your business write off all your personal expenses. There’s a fine line between what a business can write off and what is purely bogus. I was approached by The Tax People, who were selling a kit to teach people to write off their lives as businesses. The commissions were tempting, but the kit looked suspicious to me. Apparently, the IRS agreed. Here’s a list of more abusive home-based schemes to avoid.

Titillate your voyeuristic fancies with the IRS’s current list of criminal prosecutions. See what you’ve been missing?

There are enough legal ways to cut your taxes to fill several books. Perhaps that’s why I am able to fill books and articles with legal tips.

You don’t need me to tell you, do you? If it sounds too good to be true, what is it? You’ve got it! Stay away!

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.