Friday, April 29, 2011

Employment Tax Scam Continues to Make IRS “Dirty Dozen” List

The IRS's annual list of “dirty dozen” tax scams continues to include an employment tax scam known as “zero wages” [IR 2011-39].

This tax scam has appeared on the dirty dozen list since 2006. It involves filing a phony wage- or income-related informational return to replace a legitimate information return to lower the amount of taxes owed. Typically, a Form 4852, Substitute Form W-2, or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. The IRS is advising taxpayers to resist any temptation to participate in any of the variations of this scheme. Participants in the scheme may be subject to a $5,000 penalty. Taxpayers report suspected tax fraud to the IRS on Form 3949-A, Information Referral.

In addition, the IRS has seen several situations in which scam artists have filed false or misleading returns to claim refunds to which they were not entitled. In one variation of this scheme, a taxpayer sought a refund by fabricating an information return and falsely claiming the corresponding amount as withholding. The IRS takes refund fraud seriously, and has programs to aggressively combat and stop the vast majority of incorrect refunds.

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