April 05,2001

Grassley Warns of Internet-based Tax Avoidance Scams


WASHINGTON – At the height of tax filing season and all year, taxpayers should steer clearof hundreds of web sites promoting illegal schemes to avoid paying taxes, Sen. Chuck Grassley,chairman of the tax-writing Committee on Finance, said today.

“Tax scams are as old as the tax code. The Internet is giving them new life,” Grassley said.“The American people should be aware of the snake oil these hucksters are selling. They’re puttingold poison in a new bottle. The con artists get rich, and innocent people are left holding the bag.”

Grassley’s comments came after a hearing at which experts explained that hundreds ofthousands of Americans are participating in or considering participating in Internet-based or-augmented tax scams. Witnesses explained that before the Internet, con artists relied on laborintensiveseminars, phone pitches and videotape sales to reel in takers.

Now con artists send unsolicited bulk e-mail, in one case reaching an Iowa fraud investigatorwho received a suspicious anti-tax e-mail solicitation at home, or operate sophisticated web sites thatanyone with Internet access can reach. As the Federal Trade Commission’s witness said, “Acolorful, well-designed web site imparts a sleek new veneer to an otherwise stale fraud; and the reachof the Internet allows an old-time con artist to think – and act – globally as well.”

Grassley heard from one witness, Aaron Bazar of North Potomac, Md., who said heresponded to an unsolicited bulk e-mail message for a business opportunity and ended up in an antitaxpyramid scheme, losing $8,000.

Witnesses described numerous tax evasion techniques, including so-called tax-exempt trustsand business structures; off-shore accounts, banks, businesses and trusts; “dropping out” of the taxsystem by stopping payment; and charity-like or religious entities established for personal taxavoidance.

Grassley said he was disturbed by the proliferation of Internet-based or -augmented tax scamsand urged the Internal Revenue Service to take a more active role in policing them. He said helooked forward to working with Commissioner Charles Rossotti to improve enforcement in this area,particularly in terms of actively seeking tax scams on the Internet rather than waiting until scamshave snared victims.

The IRS should emulate the Federal Trade Commission’s “rapid response team” that locatesscam artists and targets them for enforcement action within days, Grassley said. In addition,Grassley said he will work with the IRS to ensure that it has the necessary tools to focus itsenforcement resources on con artists instead of lawful taxpayers.

“The IRS is well-intentioned on this point, but the agency is operating under old rules andold procedures put in place before the Internet,” Grassley said. “It’s important for the agency toinvestigate scams more quickly and shut them down before they harm innocent people. The IRScollects taxes, but it also has to protect taxpayers.”

Grassley offered a checklist to help taxpayers avoid scams.

Sen. Chuck Grassley’s Tips to Avoid Tax Scams
1. If it sounds too good to be true, it probably is.

Watch out for the pitch lines from the tax scam hucksters. Favorite lines include:-- If this were illegal, don’t you think the government would arrest me? It hasn’t.-- It’s your “right” not to pay taxes.-- Taxes are “voluntary.” Therefore, smart people will not volunteer to pay.-- Taxes are unconstitutional. The 16th Amendment was never ratified.-- Taxes have to be paid only by U.S. citizens (defined as someone born in or living in Washington,D.C., or the U.S. territories) and foreign companies doing business in the United States.-- Rich people save money on their taxes with this plan; so can you.-- The IRS is weak; play the audit lottery.-- These are elite tax planning services offered by sophisticated advisers. Your attorney/accountantdoesn’t know about them.-- Disguise your income on tax forms. You can’t be caught by IRS computers.

2. Check it out before you write the check.Before you sign up for one of these pitches, check it out. Check with your accountant or tax attorneyif you have one or anyone whose financial knowledge you trust. Be particularly wary of anybodywho says that this is a proposal that your accountant or tax lawyer doesn’t know about or doesn’tunderstand.

Check with the IRS. The agency has excellent information about potential tax scams on its criminalinvestigation web site, www.treas.gov/irs/ci. In addition, the IRS has a hotline to report suspectedtax fraud activity at 1-800-829-0433.

3. Good trust, bad trust: Say no unless you know for sure.

For many, the language regarding trusts is confusing because a trust can be a valid form of estateplanning. Bad trusts are often hawked as: “pure trust,” “common law trust,” “constitutional trust,”“complex trust,” “sovereign trust,” “unincorporated business organization” and “pure equity trust.”In addition, the IRS recommends that you watch out for these warning signs:

a) a promise to reduce or eliminate income and self-employment tax;b) deductions for personal expenses paid by the trust;c) depreciation deductions on an owner’s personal residence and furnishings;d) high fees for trust packages, to be offset by promised tax benefits;e) use of back-dated documents;f) lack of an independent trustee;g) use of post office boxes for trust addresses.

For more information, read IRS Notice 97-24 that warns taxpayers about fraudulent trust schemes.The notice can be found at www.irs.gov. Again, review the trust with a trusted financial adviser.

4. What if your boss says no to the tax man, and stops withholding on your salary?

For the vast number of employees, their salary is subject to withholding for income and payroll taxesby their employer (There is a limited exception for independent contractors, but the independentcontractor is then required to withhold on their wages).

Unfortunately, there are employers claiming that wages are not a “source” of income or that thedefinition of “sources of income” does not apply to U.S. individuals, and therefore no withholdingis necessary.

Remember: You are still on the hook for your taxes. If your employer refuses to withholdemployment taxes from your wages and the IRS is unable to collect the employment taxes from youremployer, you still have the responsibility to pay income tax, and you are ultimately responsible foryour share of the payroll tax.

If your employer decides he or she does not need to do withholding for your payroll and incometaxes, and you believe that he or she is doing so improperly, contact the IRS at 1-800-829-1040.