Irs obtains more than 100 injunctions against tax scheme promoters

The IRS has obtained civil injunctions against more than 100 promoters of illegal tax avoidance schemes and fraudulent return preparers in an ongoing crackdown that began in 2001. Many of the injunctions, obtained in cooperation with the Department of Justice, also order the promoters to turn over client lists and to cease preparing federal income tax returns for others.

Signaling a renewed fight against tax fraud, the federal government stepped up the use of civil power four years ago. Civil injunctions have subsequently been used to stop:

1. Abusive trusts that shift assets out of a taxpayer’s name but retain that taxpayer’s control over the assets.

2. The misuse of “Corporation sole” laws to establish phony religious organizations.

3. Frivolous “Section 861” arguments used to evade employment taxes.

4. Claims of personal housing and living expenses as business deductions.

5. "Zero income” tax returns.

6. Abuse of the Disabled Access Credit.

7. The claim that only foreign-source income is taxable.

The IRS identifies abusive tax promoters through a variety of means, including ongoing examinations, Internet and media research or referrals from external sources such as tax professionals. If the findings of an investigation support a civil injunction, the IRS refers the case to the Department of Justice.

If the Justice Department concurs, it files suit against the promoter requesting that the court order the promoter to refrain from the fraudulent activity. Depending on the facts and circumstances of the case, the court may issue a temporary restraining order, a temporary injunction or a permanent injunction.

At present, the courts have issued injunctions against 99 abusive scheme promoters –– 81 permanent injunctions and 18 preliminary injunctions. They have issued permanent injunctions against 17 abusive return preparers. The Justice Department has filed an additional 49 suits seeking injunction action –– 28 against scheme promoters and 21 against return preparers.

The IRS is currently investigating more than 1,000 additional promoters for possible referral to the Justice Department and conducting individual examinations on thousands of tax scheme participants.

Small business tax deduction - write-off bad debts

Practically every small business has receivables that it cannot obtain from clients. If your small business doesn't have any such receivables, consider yourself lucky. For those small businesses that suffer from uncollected receivables, solace can be taken from the fact you can claim a tax deduction.

Bad Debt Tax Deduction

A small business can write-off bad debt losses if it meets nominal requirements. To claim such a tax deduction, the following must be shown:

A. The existence of a legal relationship between the small business and debtor;

B. The receivables are worthless; and

C. The small business suffered an actual loss.

Proving there is a legal relationship between the small business and debtor is fairly simple. You must simply show that the debtor has a legal obligation to make a payment. Most businesses issue invoices or sign contracts with debtors and these documents suffice to prove the legal relationship. If you are not putting your business relationships in writing, you should begin doing so immediately.

Proving receivables are worthless is slightly more complex. A small business is required to show that the debt has become both worthless and will remain so. You must also show that you took reasonable steps to collect the receivables, but you are not necessarily required to go to court to meet this requirement. A clear example where you would meet this requirement is if the debtor filed bankruptcy.

While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. The Tax Code defines the loss as an amount that is included in your books as income, but is never collected. A classic example of such a situation would be a manufacturer that provides products to retailers on credit. The manufacturer can show a real loss if the retailer files bankruptcy. Unfortunately, there is almost no way to claim a loss if you provide hourly services and use a cash accounting method. The IRS does not consider the expenditure of time and effort to be a sustained economic loss.

Small businesses suffer all to often from uncollected receivables. If you failed to claim such losses as a tax deduction during your last three tax filing years, you should file amended tax returns to get a refund.