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Again, taken from MSN for your reading/learning pleasure:

Tax strategies certain to attract an auditor
Claiming the income tax is unconstitutional, setting up a questionable trust and using an unethical tax preparer are all guaranteed ways to get audited.
By Jeff Schnepper

Believe it or not, the Internal Revenue Service really doesn't want to audit your returns. It would prefer that you properly prepare your tax return and pay the appropriate amount. And the fact is, in recent years, fewer of us have been getting audited -- less than 2% of us each year, according to data at Syracuse University's Transactional Records Access Clearinghouse. Still, there are certain issues that are so flagrant and beyond explanation that when the IRS sees these red flags, it will audit you.

At the very least, you'll pay back taxes and a penalty. At the worst, you could face criminal charges. And that won’t change with the proposed new tax bill. So, this column is your “tax scam alert.”

Protest all you want, but pay up
First, it's important to realize that just because something is published it isn't necessarily valid or appropriate for your situation. Most tax scams come with a purported history or an alleged constitutional basis. For example, there are many individuals and groups who have proclaimed the federal income tax to be illegal and unconstitutional because of procedural errors in the ratification of the 16th Amendment in 1913. They back their claims with documented history and convoluted legal arguments.

However, while their claims may have some elements of historical truth to them, the courts, including the Supreme Court, have consistently rejected their arguments. In the final analysis, the law is what the Supreme Court says it is. No court has accepted the arguments of these “tax protesters.” For more on this, see “5 reasons you really do have to pay the IRS.”

Regardless of any history, the federal income tax is constitutional. Past arguments that it is not have consistently failed, as will future ones. Moreover, the courts are responding to these arguments with $5,000 frivolous-claim penalties. Unless you have $5,000 to throw away, plus court and legal fees, stay away from this one -- it's a clear loser!

Watch out for untrustworthy trusts
Stay away from, or at least be wary of, “family tax savings trusts” as well. These are trusts set up by unscrupulous planners who claim that you can assign your income to the trust and have it taxed to your lower-bracketed family members rather than to you in your higher bracket. You supposedly save on the difference in brackets. Shifting $100,000 in income from a 35.5% bracket for 2001 to a 15% bracket saves $20,500 in taxes. In 2002, with the 35.5% rate falling to 35%, the savings actually fall – to $20,000.

Unfortunately, these trusts don't work. The courts have consistently rejected the assignment-of-income concept for earned income. That means that you can't work and have your earnings from that work taxed to your children, even if the money is given to them. The tax is applied to the individual who earned the income. In fact, if you assign the income to your children, not only will you be responsible for the income taxes on those dollars, but you also may be subject to a gift tax on the transfer.

Trusts do work in reducing your tax on what is called “unearned” income. This is income from interest, dividends, rents and other passive investments. (Whoever called rental income “unearned,” however, never had to deal with tenants.) The difference here is that the income is derived from an asset, such as a certificate of deposit, stock or rental property, rather than from your sweat. If you transfer ownership of that asset into the trust and pay any required transfer taxes, then the income from that asset can be shifted to lower-bracketed family members. But it doesn't work with salary or other compensation.

Be very careful who prepares your tax return
Stay away from any preparer who “guarantees” a refund, or who gets paid on the basis of how much you get back. Remember that what you get back is a function of how much you had estimated or withheld in the first place. The IRS has a hit list of preparers with a history of problems, and clients of these preparers are more likely to be audited.

Be afraid, very afraid, of any tax preparer who knows tax-planning techniques that no one else knows. One of my favorite stories is about a client who came to me after several years with the “greatest tax preparer in the world.” This client had recommended the preparer to all of his friends, and they all got everything back, until the audit, years later.

The preparer was creative and innovative with his deductions. My client had an office in his home. The preparer told him to deduct the whole cost of his house, $60,000, as a business expense. My client had children. The preparer told him to claim a child-care credit and deduction because the client's wife was taking care of the children. Since it would cost $500 a week if they hired someone to take care of the kids, they could therefore claim that amount as a deduction.

My favorite deduction was the medical expense for the “bubble.” Here's the argument -- try to keep a straight face. My client lived in New Jersey, which, at the time was allegedly a state rife with air pollution. My client was advised to deduct, as a medical expense, what it would cost to create a bubble of pure air to encapsulate his family. The term “bubble expense” actually appeared on the return.

The deductions were so outrageous that, upon audit, I was able to convince the auditor that my clients were so misled that no penalties were assessed against them. They did, however, have to pay the owed taxes, interest and substantial legal fees. So did their friends who had their returns done by these “experts.” Unfortunately, the alleged experts dissolved in a pool of financial tragedy for the taxpayers they represented.

Steer clear of questionable shelters
Stay away from tax shelters that promise you deductions so large you actually “make money” on the tax savings. They are typically based on an over-valuation of assets on which the IRS can nail you in an audit. If a shelter seems too good to be real, it's probably not legitimate
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