Read part 1 of this series to learn about marketing and financing scams.
Identity Theft
All the information you have in your business is gold to an identity thief. That information is a means for draining bank accounts, opening phony lines of credit, and spending huge amounts of money at the expense of your business, employees, vendors, and customers. Tax records, payroll information, what is on your computer system, financial data from your suppliers, and credit card numbers from your customers are all information sources that identity thieves are thrilled to find. Access to the information you store can be prevented by some common sense measures. The specifics depend on the size of your company and the kind of information you have, but the basic principles remain the same. A sound information security plan should contain these key practices:
- Keep an eye on what personal information you have in your files and on your computer and how personal information moves into, through, and out of your business, including who could have access to it.
- Store only what you need for your business. If you don't have a legitimate business reason to have sensitive information in your files or on your computer, dispose of it properly by shredding, burning, or permanently deleting it.
- Secure the information you have with multiple audit trails and employee training.
Tax Scams
Tax scams are fraudulent schemes that someone may convince you will help you save money for your business. The people who encourage you to participate in these scams can be very persuasive about their legitimacy, and can charge you a significant sum to learn about them. The IRS is very aware of them, however, and you can end up being seriously burned financially and even end up in jail. Here are some of the scams the IRS considers most common:
- Since shortly after the federal income tax law was enacted, some groups have encouraged others not to comply with the law. The promoters of this scheme claim that the 16th Amendment was not properly ratified, the tax law was unconstitutional, the tax law did not apply to certain types of income, the tax law only applied to certain individuals, and the tax law violated one or more constitutional rights. Despite the courts having consistently rejected these arguments, there are still promoters pushing these schemes.
- Most taxpayers with small businesses accurately report their income and expenses. However, schemes involving inflated business expenses, deduction of personal expenses, and fake home-based businesses have become prevalent. Some promoters market a package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes but the arguments used are incorrect. They end up with money from you, and you end up in trouble with the IRS.
- Abusive trust arrangements are another scam, promoted as a way to hide the true ownership of assets and income, or to disguise the substance of transactions. Although these schemes give the appearance of separating responsibility and control from the benefits of ownership, as would be the case with legitimate trusts, the taxpayer in fact controls them. These arrangements frequently involve more than one trust, each holding different assets of the taxpayer, as well as interests in other trusts. The trusts are layered, with each trust distributing income to the next layer. Funds may flow from one trust to another trust by way of rental agreements, fees for services, purchase and sale agreements, and distributions. The goal is to use inflated or nonexistent deductions to reduce taxable income to nominal amounts. The promoters charge thousands of dollars for their packages.
- U.S. businesses are subject to tax on their worldwide income. Numerous schemes have been devised in which the true ownership of income streams and assets are hidden or disguised so as to improperly shield substantial amounts of financial activity from the U.S. tax system. Such offshore transactions generally involve foreign jurisdictions that offer financial secrecy laws in an effort to attract investment from outside their borders. These jurisdictions are commonly referred to as "tax havens" because, in addition to the financial secrecy they provide, they require little or no taxation of income from sources outside their jurisdiction. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities and life insurance plans.
- Tax-exempt organizations, by definition, are exempt from federal income tax under various provisions of the Internal Revenue Code. However, some are directly involved in Abusive Tax Avoidance Transactions (ATATs). In addition, because they are tax-indifferent, tax-exempt organizations are, at times, used by for-profit entities as accommodation parties in these transactions.
At some time in the life of your business one or more of these scams are going to cross your path. Your biggest challenge will be that scammers are very adept at making their schemes look legitimate. Your best course is to follow the old adage, "If it sounds too good to be true, it probably is." Keep a healthy dose of skepticism, especially with any deal that has a short deadline. And, if you do get approached, report the perpetrator to authorities so these scams can be shut down.
