With Daniel Hood, Editor-in-Chief of Accounting Today
Steve talks with Daniel Hood, the editor-in-chief of Accounting Today, the venerable industry publication which has just published its “2016 IRS Dirty Dozen”, a cautionary guide for everyone who pays taxes. This annual list lays out the many nefarious scams and schemes that are either executed by the taxpayer or are perpetrated against the taxpayer.
Daniel outlines the sometimes laughable, but always illegal, attempts to defraud the IRS. Some people come up with reasons to pay no tax at all, such as “I don’t owe taxes because the income tax only applies to states that were part of the original 13 colonies.” And then, on the other hand, scammers make pitches to the taxpayer, such as “Hey, I can tell how you don’t have to pay taxes. Send me $300, and I’ll send you my book.”. And there’s a vulnerable sucker around every corner for this sort of come on.
Tax shelters, which were most prominently exploited in the ‘90s, is another area where people make false claims and many of these concern an overseas business that may not even exist or that the taxpayer is not even involved with. Another classic scheme is faking a business, pretending to run a business from your home and claiming deductions for everything from your office chair to travel expenses when, in fact, that business is non-existent.
On another scale altogether is the danger of Tax ID theft, which the vulnerable (often the elderly) are prey to. This can come from many angles, even from tax preparers who promise large refunds, then take all your info, and then, ultimately, your refund, leaving the IRS completely unaware.
Even though the IRS can’t possibly check every return— and not all red flags are noticed—computers and automation are making it easier for them to spot the fuzzy tax fraud.
Steve brings up the common practice of inflating deductions or expenses, such as falsely claiming your car or your dry cleaning and, possibly most flagrant of all, claiming a pleasure boat as a business expense.
One of the most reprehensible scams, Daniel says, is the fake charity, some sneaking by under similar names such as Save the Children or the American Human Society. The elderly and even the not-so- elderly could easily fall into this trap and make donations which end up in the wrong hands.
One of the worst of these illegal practices going on this year is coming from organized crime groups who make scary and threatening phone calls claiming to be from the IRS. Since the IRS by name frightens most people, often the unsuspecting will fall victim to the tax fraud and give out social security numbers and even make checks out for large sums of money. Daniel cautions that the IRS NEVER makes phone calls. All of their communication, especially an initial contact, is done by mail.
To close, Daniel cautions every taxpayer to be aware of the bad guys and dirty tricks out there.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Just in time for tax season, the venerable industry publication Accounting Today has just published its “2016 IRS Dirty Dozen”. I’ve invited Daniel Hood, its editor-in-chief, to join me to make sure that you don’t get into trouble if you’re planning something just a little dicey. Hey, Daniel. Welcome to the show.
Daniel Hood: Hi, Steve. Thanks for having me.
Steve Pomeranz: There’s lots of different dishonest schemes out there—offshore cons, dishonest preparers—and the IRS puts this annual list together of 12 scams?
Daniel Hood: Yes, they’ve been doing it for decades now. Every year, it’s a fascinating look. It’s sort of all the problems they had the previous year, all the scams and schemes they ran across previously.
Steve Pomeranz: Interesting. Let’s go through them. The first one is, “I don’t owe taxes because…why?”
Daniel Hood: I have to say this is my absolute favorite because they’re all ridiculous. It’s things like, “I don’t owe taxes because the income tax was never appropriately approved by Congress for my state, or my local municipality, or whatever.” My absolute favorite is, “I don’t owe taxes because the income tax only applies to states that were part of the original 13 colonies.” They’re crazy.
People put out ads saying, “Hey, I can tell how you don’t have to pay taxes. Send me $300, and I’ll send you my book.” The book outlines one or another of these ridiculous theories. People so much don’t want to pay taxes that they believe them. They’ve all been disproved in court. The IRS just laughs at them and then charges a huge fine and all the back taxes.
Steve Pomeranz: What is the penalty for filing this kind of frivolous return?
Daniel Hood: It depends. Generally speaking, it can be as much as $5,000. Sometimes it’s a matter of paying back the back taxes. It depends sort of how far you push. If you push the IRS really far and say, “I really want to go to court on this,” it’ll be worse for you. If you say, “Okay. It was ridiculous and I’m sorry,” it’ll go better.
Steve Pomeranz: I started in the investment industry back in 1981. Tax shelters were a big deal back then, especially these oil and gas partnerships where you can get these amazing deductions and so on and so forth. Number two is, again, these tax shelters. I guess they’re still up and running. What are some of the typical tax shelters that the IRS frowns on?
Daniel Hood: You know what? The oil and gas is still a problem. All kinds of false businesses, a lot of international issues are really what’s tied in here now. People claiming deductions for businesses overseas that may or may not exist that they may or may not be involved in. They sort of sold the share in this potentially real, but more often fake, business that’s domiciled overseas that does something no one quite understands, but you can get a deduction for it on US taxes.
Steve Pomeranz: Only the very wealthy normally can do these. Right now, we have something available to you.
Daniel Hood: Exactly. The basic rule is if it sounds too good to be true, it almost definitely is.
Steve Pomeranz: It’s too bad because that beachfront property in some sunny faraway land that I can get a tax deduction on just sounds so fantastic. Here’s number three, faking a living. Don’t invent income to erroneously qualify for tax credits. This is a case where you’re actually adding income to your return in order to get some kind of tax deduction or credit.
Daniel Hood: Right. You’re pretending you run a business. You’re pretending you have a business out of your home. You’re pretending you’re part of some kind of business that generates some income because that particular type of business, whatever it may be is eligible for a tax credit or deduction. Actually, the interesting thing about this is this ties into this year’s list and the last couple of years. The list has been split a little bit between sort of these things we’ve been talking about. These are all things that taxpayers might put on their tax returns, and they’re sort of dodgy. We all know it when we put it on, but we hope we can get away with it.
This starts to tie into these new parts of the dirty dozen we’ve been seeing over the past couple of years where it’s actual criminals faking this for other people’s tax returns…
Steve Pomeranz: Yeah, that’s bad news.
Daniel Hood: … Tax ID theft. You’ll see instances of tax preparers will say, “Give me all your information. I’ll prepare your return.” They will invent a business for you. Pretend that you had to make up all kinds of expenses, get a larger refund from the IRS for that. Take that larger refund and then give you what they said they’ll give you for your refund in the first place. In the meantime, the IRS has on record that you have this business that you’ve been running, you’ve been claiming, all these deductions. You never see either the refund or the return. People do this on their own. They may put it on their own return. In some cases, unscrupulous tax preparers are doing it for them.
Steve Pomeranz: I get that. It’s all based on the assumption that nobody is looking and nobody is checking. You always read these reports about these small amounts of actual audits that take place due to understaffing at the IRS. Where does this all fit into these schemes? If you were does generic hydrocodone look like sure you were going to get caught, you wouldn’t do it. There must be some wiggle room in there because people are thinking, “Hey, they’re not really watching.”
Daniel Hood: Right. There’s no question that the IRS can’t check every single individual return. What people should bear in mind though is that particularly over the last 5 to 10 years, the IRS has gotten much, much better at using automation to go through tax returns. It used to be, “Well, I have a relatively small amount of income. No one is really going to check that carefully on whether I actually made that charitable deduction of a $100.” Nowadays, the IRS computer systems can find a lot of that stuff. They still may not go after the $100 deduction that you didn’t, did donate to goodwill.
They’re much, much better at just automatically finding and red flagging things like international income, business income for someone who’s never reported it before. All these sort of things where you would think, “Well, they don’t have enough people to check it.” Now they’re using computers and they’re getting better at it. They still won’t get everything, obviously.
Steve Pomeranz: My guest is Daniel Hood. He is the editor-in-chief of Accounting Today. We’re talking about the “2016 IRS Dirty Dozen.” Let’s go to no credit, big problem. What is that telling us?
Daniel Hood: This is another one where people are claiming credits they don’t get often in relation to some kind of business, some kind of activity they’re not involved in. You talked about oil and gas activities earlier. Fuel tax credit is one that a lot of people try to claim. It’s so specific. The rules for it are so specific that very, very few people qualify for it, but people think, “I use fuel. I’m sure I must get this credit.”
Steve Pomeranz: Yeah, I got you.
Daniel Hood: They don’t want to look too closely into it. Generally speaking, credits are … the rules around most tax credits are pretty strict. The IRS expects … knows what the rules are and will be able to see if you really are eligible for that kind of credit.
Steve Pomeranz: Here’s a common tax fraud that a lot of small businesses employ. It’s the idea of falsely inflating deductions or expenses on their returns to underpay what they owe. Before you respond, I want to give you a quick story. Some years ago, I was talking to a person who was involved in taxes and the like. There’s this phrase in investing called EBITDA, which is earnings before interest, depreciation and taxes and so on. He had a special term. He called EBOT—E-B-O-T—which was earnings before owner theft. Really what that amounts to is this idea about you put your boat in the business. You put your car in the business, parts of your house and all kinds of things you’re throwing in the business to get a deduction. That’s illegal and bad practices. I don’t know. What do you have to say about that?
Daniel Hood: You don’t even want to call it theft so much as it’s just sort of desperation. They’re reaching out. People will try to take their dry cleaning or their dog because ‘big clients like my dog and I keep them in the office.” They like my dog, so it’s a business expense. They’re just reaching. They’re really, really reaching. There’s a certain amount of common sense that you have to sort of say, “Well, is that really a business expense?” If someone else looking at it would say, “You can’t deduct that,” then you probably shouldn’t deduct it.
Steve Pomeranz: Don’t push the envelope on that, for sure. You’ll know it’s wrong if you got to a pleasure boat and you put it in the business. We all know what’s that all about.
Here’s one. This is a real warning to everybody. This is not a tax fraud on taxpayers’ part, but this is important. Be careful to whom you write your check with, to charities, because there are a lot of scams out there which will have a spelling that’s close to the name of the charity. If you’re not careful, you may end up sending them a check, but it’s not actually the charity. Give me a couple of examples of that, Daniel.
Daniel Hood: Well, we have some we joke about..ones we’re talking about… Unichef and my favorite is Shave the Children. In some cases, they’re not even scamming in the sense of using a name that’s close to another name. In some cases, they just make up a name that sounds like it’s a legitimate charity and they’re just not … they’re not even playing on another charity’s name. They’re just saying, “We’re raising money for victims of Hurricane Sandy,” or, “We’re raising money for police officers or police dogs shot in the line of duty kind of thing.” They’re just not…they’re just lying. There’s a website called guidestar.org where you can go and check and make sure the charity you’re donating to is IRS recognized so your contributions will be deductible.
Steve Pomeranz: You can go online and check all these. One example that you gave me was the American Human Society. They left off the E for humane and it’s the American Human Society. Now, that’s easy to miss. Be really, really careful, especially if you’re being solicited by phone or in the mail. Really check closely because that can be a bad mistake. Number seven here is free money. What does that mean?
Daniel Hood: This goes back to the basic idea of if it sounds too good to be true, it is. This ties in a lot of the scams and tax fraud we’re hearing about. If they’re saying you can deduct a huge amount of money, you probably can’t. It’s very rare that any of these scams … they vary from a lot of things we’ve talked about to foreign donations, from all kinds of areas. You just need to really bear that in mind with pretty much everything. Anytime they’re promising you a huge amount of money, it’s probably not legitimate. If they’re telling you, you qualify for the child tax credit even though all your children are out of college, you got to question that. You have to think about it. Every time they’re promising a large amount of money, that’s got to be a red flag for you.
Steve Pomeranz: Will the IRS ever call you to threaten you about the fact that you have not paid your taxes, or they imply that there’s some egregious mistake? Are they ever going to call you?
Daniel Hood: Never, never. I’m so glad you brought that up because it’s hugely important. It’s one of the biggest scams going on this year. The IRS is really worried about it because what’s happening is this is one of those things where I’ve talked about earlier. It’s kind of, things that taxpayers are doing, a lot of these dirty dozens, or things that taxpayers are kind of dodgy on their taxes. Three or four of them are actual sort of organized criminal groups. What they’ll do … three or four of the dozen are related to sort of organized criminal groups. One of them, these guys get together and they basically set up call centers where they call people and say, “Hey, I’m an agent from the IRS. Here’s my identification number. You owe us $5,000. If you don’t pay me now, we’re going to put a lien on your house. We’re going to call your boss and garnish your paycheck.” They just make all these kinds of very, very serious threats. Everybody is afraid of the IRS. You get a call from them and you think, “Wow, I must be in serious trouble.”
The important point to remember is the IRS never ever calls people. They never call. Their first contact to you will never be by phone. It will always be in the mail. They stress this constantly because, like other things, they don’t have enough people to make all the phone calls they have to make. It’s their protocol. They go by mail to start. If somebody calls you up and says, “I’m from the IRS and you owe me money. You need to transfer it today.” You just say, “Send me something in the mail. I’m happy to look at it that way.” They will hang up on you right away.
The great story here is, like I said, these are organized criminal gangs. They run it kind of like a call center. They famously once called the head of the tax authority of the State of Connecticut. They called him out.
Steve Pomeranz: They don’t care.
Daniel Hood: He said, “Do you know whose house you’ve reached? I’m the head of the tax authority of Connecticut.” At which point, the conversation got a lot shorter. It’s really scary because it preys on the elderly, people that are not that educated, a lot of lower-income people who don’t really realize how the IRS works. They just terrify them into giving money.
Steve Pomeranz: My guest is Daniel Hood, editor-in-chief of Accounting Today talking about the newly published “2016 IRS Dirty Dozen”. Daniel Hood, thank you so much for joining us.
Daniel Hood: Thanks for having me, Steve.