Special Report: Tax Traps

Everything you should know, so you don't fall into any tax traps.

"At first it sounded too good to be true," Dr. David Anthony said.

When chiropractor David Anthony heard of a way to lower his taxes, he was all ears. His tax preparer convinced him to put his money in a trust, or tax shelter. But after awhile, Anthony doubted the trust was legal.

"Every six months I would say to them, ‘I'm having big concerns about this.’" Dr. Anthony said. "Every time, they would take me aside and say, ‘David, young man, you're worrying too much, let us worry.’"

His gut feelings were right. The IRS called for an audit, and told him, according to Dr. Anthony, "we consider these sham trusts, by the way you owe us $198,000 in back taxes."

The taxes, penalties, and fees wiped out his retirement savings.

"It took a toll on me, I developed hypertension," Dr. Anthony said.

Illegal trusts are just one of a dozen schemes the IRS is warning taxpayers to avoid. Even though a tax preparer might give bad and even, illegal, advice. The government says it's you, the taxpayer, who is ultimately responsible for what's written on your return.

"It's really not worth it. It's a risk," Massachusetts IRS Criminal Investigations Steven Hickey said.

Another crime of which to be aware: identity theft. Andrew Bradley was expecting a $1,600 refund. Instead, the IRS flagged his return.

"Someone with my name, my address, using my social security number had already filed taxes for 2004," Bradley said.

The identity thief used a fake W-2 form and scammed $4,000 out of Uncle Sam. Now, Bradley has to prove he's the one who deserves a refund, not some phony.

"I definitely want to see them brought to justice," Bradley said. "And also, I want to see my refund."

Another scheme: tax preparer fraud.

One Boston tax preparer was indicted last month for falsely claiming huge charitable donations on 16 different returns.

Talmus Taylor refused to answer our questions. If convicted, he faces up to 48 years in prison, and his clients will need to pay Uncle Sam their full tax amount, plus fees and penalties.

"It does pay to be choosy," Hickey said. "You're indulging your entire financial existence, you're entire financial life to them."

When choosing a tax preparer, stay away from these warning signs:

Preparers who:

• Claim they'll get you a big refund no matter what.
• Base their fee on a percentage of your refund.
• Also, never sign a blank return.

Be sure to:

• Look for a preparer who is a member of a professional society.
• Ask a lot of questions, and leave with a copy of your return.
• Keep all your tax records for at least 5 years.

This way, you'll pay only your fair share and nothing more.

For links to the 'Dirty Dozen' scams listed by the IRS, click here.

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