Tax fraud and tax protesters.

• Author: Brown, William P.

One of the Internet's many effects is more widespread exposure to fraudulent tax avoidance schemes, as well as what the Federal judiciary has repeatedly described as "frivolous tax protester theories." The Internet provides two opportunities for tax fraud schemes. First, it is a place to sell them. Second, it serves as a library for people looking for new fraudulent ideas.

Until recently, many tax practitioners had neither heard of most of these so-called "opportunities" or "theories" nor encountered a client who believed a particular contention's validity. However, practitioners are describing more encounters with these positions. A better understanding of the various arguments will help practitioners refute them and deal with client questions.

This column is not a complete list of tax fraud schemes or tax protester theories; however, it does present some of the more prevalent ones.

Tax Fraud Schemes

Slavery reparation credit. Some newspapers have referred to this as "The Tax Scare for the Ages." Promoters of this scare claim that Congress has authorized a slavery reparation tax deduction, credit or rebate. The promoters are generally tax preparers who, while advising ill-informed clients, offer to prepare the paperwork for a refund--for an additional charge.

The IRS received nearly 80,000 claims for slavery reparations in 2001, totaling $2.7 billion. What's worse? The June 2002 issue of Kiplinger's Personal Finance (www.kiplinger.com/ magazine/archives/2002/June/ managing/digest.html) reported that the IRS had "paid out more than $30 million to taxpayers who claimed a nonexistent slavery-reparation tax credit ..."

Social Security refund. This scam is one of the stand-alone steps in a "detaxing" fraud. Promoters tell potential victims that they can recover all of their FICA and Medicare taxes paid. A typical additional charge would be $100 plus 10% of the refund amount. The taxpayer never sees the refund, but does get to meet with the IRS.

Home-based businesses. A number of these schemes exist. New ones crop up, often with the same players, as state or Federal authorities eliminate old ones. The general approach is to claim that thousands of dollars in tax deductions can be realized by starting a home-based business. Ignored in the promotional materials are the Sec. 183 hobby loss rules and the Sec. 162 ordinary and necessary business expense tests.

As these schemes almost always double as multilevel marketing "opportunities," scheme...