Briefly Noted

    Tax Scams: The Dirty Dozen

    The Internal Revenue Service (IRS) has unveiled its annual listing of notorious tax scams, the “Dirty Dozen,” reminding taxpayers to be wary of schemes, as well as promoters of schemes, that promise to eliminate taxes or otherwise sound too good to be true. The IRS’ top 12 schemes this year are:

    1. Trust misuse

    2. Frivolous arguments—for example, arguing that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination.

    3. Return preparer fraud

    4. Credit counseling agencies that claim they can fix credit ratings; push debt payment agreements; or charge high fees, monthly service charges or mandatory “contributions” that may add to debt.

    5. “Claim of right” doctrine, in which the taxpayer attempts to take a deduction equal to the entire amount of his or her wages that is labeled “a necessary expense for the production of income” or “compensation for personal services actually rendered.”

    6. “No gain” deductions, in which filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A under “Other Miscellaneous Deductions” and attaching a statement to the return, referring to court documents and including the words “No Gain Realized.”

    7. Corporation sole, in which participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society so they are exempt from federal income taxes as a nonprofit, religious organization.

    8. Identity theft involving taxes. Last year the IRS shut down a scheme in which perpetrators used E-mail to announce to unsuspecting taxpayers that they were “under audit” and could set matters right by divulging sensitive financial information on an official-looking Web site. Taxpayers should note the IRS does not use E-mail to contact them about issues related to their accounts. If taxpayers have any doubt whether a contact from the IRS is authentic, they can call 800-829-1040 to confirm it.

    9. Abuse of charitable organizations and deductions

    10. Offshore transactions

    11. Zero return, in which promoters instruct taxpayers to enter all zeros on their federal income tax filings.

    12. Employment tax evasion
    The IRS removed four scams from the Dirty Dozen this year: slavery reparations, improper home-based businesses, the Americans with Disabilities Act and EITC dependent sharing. The agency has noticed declines in activity in some of these schemes. But taxpayers should remain wary because the IRS has seen old scams resurface or evolve.


    You Be the Judge: PIABA Seeks Arbitrators

    The Public Investors Arbitration Bar Association (PIABA) is dedicated to helping level the playing field for individual investors who pursue securities arbitration to resolve disputes with broker-dealers.

    There is a lack of available public arbitrators (those not affiliated with the securities industry who serve on arbitration panels) and PIABA is seeking to recruit interested parties. NASD public arbitrators participate in one day of training, then are selected to hear claims of aggrieved investors.

    No specialized training in securities law is required. It is an intellectually stimulating public service, and arbitrators are paid $200 per four-hour session.

    Arbitrator applications are available on the home page of the PIABA Web site ( Go to “Click Here for Arbitrator Applications.”

    Real Estate Reality: Key Errors to Avoid

    Where does real estate investing in today’s sluggish investment marketplace fit in a long-term financial plan? In the face of continuing sluggishness in the stock market, more and more investors are finding themselves tempted by the lure of real estate. However, there are some basic “rules of the road” for investing in real estate that should be understood by investors who want to avoid getting burned, according to a warning issued recently by three members of the Zero Alpha Group, a nationwide network of independent investment advisory firms.

    For investors looking at real estate, the firms provided the following tips to prevent getting burned in a hot real estate market:

    • Don’t bet it all on real estate.

    • Think tax-advantaged investing when it comes to real estate. Since it is very tax inefficient, it is tax advantageous to hold real estate within tax-deferred accounts.

    • Consider REITs as a substitute for direct property ownership. Not only are REITs a helpful tool in portfolio rebalancing, they can generate much-needed cash flow and, at the moment, are posting good yields (although you still need to think through the tax-efficiency issues of REITs).

    • As an alternative, look at owning real estate through managed pools. This approach takes no leverage and is broadly diversified.

    Tax Refunds: Already Spent

    “How would you be most likely to spend your tax refund?”

    Source: survey.