The Internal Revenue Service has issued a warning to taxpayers about using frivolous tax arguments to avoid paying taxes. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. Such arguments have been repeatedly thrown out of court.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

A recurring Dirty Dozen theme through the years involves claims about “secret” schemes to avoid people paying taxes.

In “The Truth about Frivolous Tax Arguments,” the IRS outlines some of the more common frivolous arguments, explains why they’re wrong and cites relevant court decisions. Examples include:

 – The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds;

 – The only “employees” subject to federal income tax are those who work for the federal government;

 – Only foreign-source income is taxable.

Perpetrators of illegal scams, as well as those who make use of them, may face possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Don’t Get Talked Into Using a Frivolous Argument

Taxpayers have the right to contest their tax liabilities using IRS administrative appeals procedures or in court, but they are still obligated to follow the law.

Besides risking criminal prosecution, taxpayers can also face a variety of civil penalties. Key among them is the $5,000 penalty for filing a frivolous tax return. The penalty applies to anyone who submits a frivolous tax return or other specified submissions, such as a request for a collection due process hearing, installment agreement, offer-in-compromise, or taxpayer assistance order, if any part of these submissions are based on a frivolous position. A list of more than 40 such positions can be found in Notice 2010-33, 2010-17 I.R.B.609. The list is not all inclusive, and the IRS and the courts may add to it at any time.

The IRS reminds taxpayers these schemes also can bring other civil penalties including:

– Accuracy-related penalty—20 percent of the underpaid tax;

– Civil fraud penalty—75 percent of the underpayment attributable to fraud;

– Erroneous refund claim penalty—20 percent of the excessive amount.

Late-filing and late-payment penalties may also apply. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.

Further details, including a list of the Dirty Dozen and information about other tax scams, can be found on

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As part of its annual “Dirty Dozen” list of tax scams, the Internal Revenue Service warned taxpayers to avoid falsely inflating deductions or expenses on tax returns. Common areas targeted by unscrupulous tax preparers involve overstating deductions such as charitable contributions, padding business expenses, or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

Padding deductions is part of this year’s “Dirty Dozen” lists of common tax scams. Taxpayers may encounter these any time, but many of these schemes peak during the tax filing season as people prepare their returns or hire people to help with their taxes.

The IRS reminds taxpayers to be careful when claiming these credits. If a return preparer suggests using these options improperly, the taxpayer is at risk – and the person who provided the advice is long gone.

Avoid Scams and File an Accurate Return

Preparing an accurate tax return is a taxpayer’s best defense against scams – and the best way to avoid triggering an audit. The IRS reminds taxpayers that significant penalties may apply for taxpayers who file incorrect returns including:

– 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.

– $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.

– In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the tax return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as willful failure to file a return; supply information; or pay any tax due; fraud and false statements; preparing and filing a fraudulent return and identity theft.

One way for taxpayers to ensure they file an accurate tax return and claim only the tax benefits they’re eligible to receive is by using tax preparation software. Question and answer formats lead taxpayers through each section of the return. Prepare and e-file federal taxes free with IRS Free File. Taxpayers with income of $66,000 or less can file using free brand-name tax software. Those who earned more can use Free File Fillable Forms, the electronic version of IRS paper forms. Either way, everyone has a free e-file option, and the only way to access Free File is on

Community-based volunteers at locations around the country also provide free face-to-face tax assistance to qualifying taxpayers. Volunteers help taxpayers file taxes correctly, claiming only the credits and deductions they’re entitled to by law.

Taxpayers should know that they are legally responsible for what is on their tax return, even if it is prepared by someone else.

To find tips about choosing a return preparer, better understand the differences in credentials and qualifications, research the IRS preparer directory, and learn how to submit a complaint regarding a tax return preparer, visit

More information about IRS audits, the balance due collection process and possible civil and criminal penalties for noncompliance is available at the IRS website.

Taxpayers can also learn more about the Taxpayer Bill of Rights at This is a set of fundamental rights each taxpayer should be aware of when dealing with the IRS, including when the IRS audits a tax return.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

The Internal Revenue Service has warned taxpayers to avoid making improper claims for business credits, a common scam used by unscrupulous tax preparers. Two common credits targeted for abuse include the research credit and the fuel tax credit. While both credits have legitimate uses, there are specific criteria that must be met in order to qualify for them.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

As part of the 2018 “Dirty Dozen” tax scams, the IRS reminds taxpayers to watch out for these red flags involving business credits when dealing with return preparers. Remember, the taxpayer is responsible for the information on the tax return long after the scammer is gone.

Each year, the IRS publishes its “Dirty Dozen” list of a variety of common scams that taxpayers may encounter any time. These can especially peak during the tax filing season as people prepare their returns or hire people to help with their taxes.

Research Credit Scams

Section 41 of the Internal Revenue Code provides a credit for increasing research activities, commonly known as the “research credit.” Congress enacted the research credit in 1981 to provide an incentive for American private industry to invest in research and experimentation.

The IRS continues to see significant misuse of the research credit. Improper claims for this credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses.

To qualify for the credit, a taxpayer’s research activities must, among other things, involve a process of experimentation using science with a goal of improving a product or process the taxpayer uses in its business or holds for sale or lease. However, there are certain activities specifically excluded from the credit, including research after commercial production, adaptation of an existing business product or process, foreign research and research funded by the customer. Qualified activities also do not include activities where there is no uncertainty about the taxpayer’s method or capability to achieve a desired result.

The IRS often sees expenses from non-qualified activities included in claims for the research credit. In addition, qualified research expenses include only in-house wages and supply expenses and 65 percent (typically) of payments to contractors. Qualified research expenses do not include expenses without a proven nexus between the claimed expenses and the qualified research activity.

Steps to Properly Claim the Credit

Taxpayers who qualify for the credit may claim up to 20 percent of qualified expenses above a base amount by completing and attaching Form 6765, Credit for Increasing Research Activities, to their tax return. For tax years beginning in 2016, eligible small businesses may use the research credit to offset the alternative minimum tax. Also for tax years beginning in 2016, qualified small businesses may elect to use a portion of the research credit as a payroll tax credit against the employer’s portion of the Social Security tax. Qualified small businesses make this election on Form 6765 and must complete and attach Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, to their Form 941, Employer’s Quarterly Federal Tax Return.

To claim a research credit, taxpayers must evaluate and document their research activities contemporaneously (i.e. over the period of time in which the research occurs) to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, taxpayers must have a factual basis for the assumptions used to create the estimates.

Unsupported claims for the research credit may subject taxpayers to penalties. Taxpayers should carefully review reports or studies prepared by third parties to ensure they accurately reflect the taxpayer’s activities. Third parties who are involved in the preparation of improper claims or research credit studies also may be subject to penalties

Fuel Tax Credit Scams

Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000. Furthermore, illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

The fuel tax credit is generally limited to off-highway business use or use in farming.  Consequently, the credit is not available to most taxpayers. Still, the IRS routinely finds unscrupulous tax return preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds.

The federal government taxes gasoline, diesel fuel, kerosene, alternative fuels and certain other types of fuel. Certain commercial uses of these fuels are nontaxable. Individuals and businesses that purchase fuel for one of those purposes can claim a tax credit by filing Form 4136, Credit for Federal Tax Paid on Fuels.

The tax is on fuels used to power vehicles and equipment on roads and highways. Taxes paid for fuel to power vehicles and equipment used off-road may qualify for the tax credit and may include farm equipment, certain boats, trains and airplanes.

Improper claims for the fuel tax credit generally come in two forms. An individual or business may make an erroneous claim on their otherwise legitimate tax return. It is also possible for an identity thief to claim the credit as part of a broader fraudulent scheme.

The IRS has taken a number of steps to improve compliance processes involving fuel tax credits. IRS compliance systems are preventing a significant number of questionable fuel tax credit claims from being processed. For example, new identity theft screening filters have also improved the IRS’s ability to identify questionable fuel tax credit claims during return processing.

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The Internal Revenue Service has warned taxpayers to be alert to unscrupulous return preparers touting inflated tax refunds. According to the IRS, these scam artists frequently prey on older Americans, low-income taxpayers, and others with promises of big refunds. These refund scams remain on the annual “Dirty Dozen” list of most common tax scams, particularly during tax filing season.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

Scam artists pose as tax preparers during tax time, luring victims by promising large federal tax refunds. They use flyers, advertisements, phony storefronts or word of mouth to attract victims. They may even make presentations through community groups or churches.

Scammers frequently prey on people who do not have a filing requirement, such as those with low incomes or older Americans. They may also prey on non-English speakers who may or may not have a requirement to file a tax return.

Con artists dupe people into making claims for fictitious rebates, benefits or tax credits. They may also file a false return in their client’s name, and the client never knows that a refund was paid.

Scam artists may also victimize those with a filing requirement who are due a refund. They do this by promising larger refunds based on fake Social Security benefits and false claims for education credits or the Earned Income Tax Credit (EITC) among others.

Those perpetrating these scams can see significant penalties and interest and possible criminal prosecution. To protect taxpayers, the IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

Falsely Claiming Zero Wages, Filing Phony Forms W-2, 1099

For years, the IRS has seen a series of contorted and creative efforts by scam artists who try to avoid taxes.

Filing a phony information return, such as a Form 1099 or W-2, is an illegal way to lower the amount of taxes owed. The use of self-prepared, “corrected” or otherwise bogus forms that improperly report taxable income as zero is illegal. So is an attempt to submit a statement rebutting wages and taxes reported by a third-party payer to the IRS.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Taxpayers should resist the temptation to participate in any variations of this scheme. The IRS is aware of this scam, and the courts have consistently rejected attempts to use this tax dodge. Perpetrators receive significant penalties, imprisonment or both. Simply filing this type of return may result in a $5,000 penalty.

The IRS sometimes hears about scams from victims worried about losing their federal benefits, such as Social Security, veterans or low-income housing benefits. The loss of benefits comes as a result of false claims being filed with the IRS that provided incorrect income amounts.

Choose Tax Preparers Wisely

Honest tax preparers provide their customers a copy of the tax return they’ve prepared. Scam victims frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before paying victims, a practice not used by legitimate tax preparers.

The IRS reminds taxpayers that they are legally responsible for what’s on their return even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers can help protect themselves by taking some simple steps before choosing a tax preparer. Start with the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help taxpayers find a tax return professional with the right qualifications. The Directory is a searchable and sortable listing of preparers registered with the IRS. It includes the name, city, state and zip code of:

– Attorneys

– CPAs

 – Enrolled Agents

– Enrolled Retirement Plan Agents

– Enrolled Actuaries

– Annual Filing Season Program participants

Also check the preparer’s history. Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to and search for “verify enrolled agent status” or check the Directory.

To find more tips on choosing a tax professional, understanding the differences in credentials and qualifications, researching the IRS preparer directory or learning how to submit a complaint regarding a tax return preparer visit

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The Tax Cuts and Jobs Act, enacted in December 2017, is the most significant change to the U.S. Tax Code since 1986 and dramatically alters the tax landscape for individuals. A number of changes take effect this year, while other provisions will not take effect until 2019. Many provisions are temporary, set to expire in 2026, which creates uncertainty for tax planning.

New Income Tax Rates and Loss of Itemized Deductions

Most fundamentally, the new law significantly lowers income tax rates for individuals. The top individual rate is now 37 percent – down from 39.6 percent. Individuals can earn more before the top rate applies as well. Under the prior law, the top rate applied to any income over $470,000 for married individuals filing jointly. Now, the top rate for those individuals applies only to income over $600,000. These lower rates currently apply only to the 2018 through 2025 tax years.

The law also significantly increases the standard deduction. The standard deduction for married individuals filing jointly is now $24,000. For head-of-household filers, the standard deduction is now $18,000, and $12,000 for all other taxpayers. The law slashes a number of itemized deductions, however, such as the deductions for unreimbursed employee expenses, union dues, and tax preparation fees. As a result, more individuals should elect the standard deduction.

State and Local Deduction Limitation

Another major change is a new $10,000 limitation on the deduction for state and local tax, or SALT, which includes state and local income taxes, local real estate taxes and state sales taxes. Previously, there was no limitation on an individual’s SALT deduction. The new limitation is more unfavorable for individuals in high tax states, such as California and New York. The average SALT deduction in California was around $18,500, while the average deduction in New York was around $22,000.

Some states, notably New York and California, are attempting to work around the SALT limitation. The California Senate recently passed a bill that would allow taxpayers a credit against their state income tax for contributions to the newly created California Excellence Fund. The theory is that Californians could also deduct these contributions for federal tax purposes as charitable contributions. If the California bill becomes law, the IRS will likely challenge it. It is unclear whether these “contributions” would actually count as charitable contributions because there would be no real charitable intent.

New York, New Jersey and Connecticut are also preparing to sue the federal government to challenge the SALT deduction limitation.

Mortgage Interest Deduction Limitation

The law also reduces the amount of mortgage interest individuals can deduct. The previous limit was $1 million, but the new law caps mortgage interest deductions at $750,000 on acquisition indebtedness. Acquisition indebtedness is debt incurred in acquiring, constructing or substantially improving a residence. The new law also completely disallows the deduction for home equity indebtedness interest – even if the home equity loan was taken out before the new law was enacted.

Increased Charitable Contribution Deduction Limitation

The new law is more favorable to charitable contributions. It increases the limits on deductions for charitable contributions to public charities and some private foundations from 50 percent to 60 percent of an individual’s adjusted gross income. For tax purposes, however, the increased limit is helpful only for individuals whose itemized deductions are higher than the increased standard deduction.

One way to beat the higher standard deduction and take advantage of the increased limit on itemized charitable deductions is to “bunch” charitable contributions that would otherwise be made over several tax years into one year.

Other Changes to Consider

There are a number of other changes individuals should consider. The law removes the tax for failing to have health insurance, starting in 2019. This could effectively undermine the entire Affordable Care Act. It also modifies the alternative minimum tax, or AMT, by increasing the exemption amount. The higher exemption amount means that fewer taxpayers will be subject to the AMT. The law also curtails the availability of “like-kind” exchanges.

Under Section 1031, taxpayers could previously exchange all property for similar property and defer the tax. Now, however, real estate is the only property that qualifies for like-kind exchange treatment.

Finally, it is important to note the significant changes for taxpayers who hold interests in pass-through entities. The new law creates a 20 percent deduction for certain business income from pass-through entities. Importantly, however, the deduction does not apply to certain service businesses, including law and accounting firms.

On March 13, 2018, the Internal Revenue Service’s Large Business and International Division announced that it was adding five more compliance campaigns to its previously-announced list of 24 such campaigns. The compliance campaigns signify LB&I’s move toward “issue-based examinations” premised upon pre-selected issues that present the greatest risk of non-compliance. According to LB&I, the stated goal of this effort is to “improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.”

In January 2017, LB&I unveiled its first 13 campaigns to be implemented as part of its effort to move toward issue-based examinations of taxpayers based upon risk assessments. In November 2017, LB&I announced the identification and selection of 11 additional compliance campaigns. At the time, LB&I stated that more campaigns would continue to be identified, approved, and launched in the coming months.

LB&I noted that the newest campaigns were identified through data analysis and suggestions from IRS compliance employees. The five new campaigns are the following:

  • Costs that Facilitate an IRC Section 355 Transaction
    Practice Areas: Enterprise Activities
    Lead Executives: Scott Ballint
    Description: Costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off, split-off or split-up, must be capitalized and are not currently deductible. Some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed. The goal of this campaign is to ensure taxpayer compliance with the requirement to capitalize, not deduct, the facilitative costs when the distribution is completed. The treatment stream for this campaign is issue-based examinations.
  • Self-Employment Contributions Act (SECA) Tax
    Practice Areas: Pass Through Entities and Northeastern Compliance
    Lead Executives: Cliff Scherwinski and Darlena Billops-Hill
    Description: Partners report income passed through from their partnerships. If the partner is an individual who renders services, the partner’s distributive share of income is subject to self-employment tax under the Self-Employment Contributions Act (SECA). Some limited partners and limited liability company (LLC) members who render services to clients on behalf of the partnership or LLC do not report flow-through income as earnings from self-employment and do not pay SECA tax. The Service’s goal in this campaign is to increase compliance with the law as supported by several recent court decisions. The treatment streams for this campaign will be issue-based examinations and outreach to practitioners, professional service provider associations, and software vendors.
  • Partnership Stop Filer
    Practice Areas: Pass-Through Entities and Western Compliance
    Lead Executives: Cliff Scherwinski and Eric Slack
    Description: Partners report income, losses, and other items passed through from their partnership. Some partnerships stop filing tax returns for various reasons yet still have economic transactions that are not being reported to their partners. That activity is likely not being reported by the partners. The treatment streams for this campaign include issue-based examinations, soft letters encouraging voluntary self-correction, and stakeholder outreach.
  • Sale of Partnership Interest
    Practice Areas: Pass-Through Entities and Eastern Compliance
    Lead Executives: Cliff Scherwinski and Joseph Banks
    Description: A partner must report the sale of a partnership interest on their tax return. This campaign will address taxpayers who do not report the sale or report the gain or loss incorrectly. Incorrect reporting includes the amount and character of the gain or loss. Taxpayers may report the entire gain as long-term capital gain (usually 15 percent) when a portion of the gain may be ordinary gain or subject to the 25 percent or 28 percent long-term capital gain rates. A variety of treatment streams will address noncompliance, including, but not limited to, examinations and soft letters.
  • Partial Disposition Election for Buildings
    Practice Area: Eastern Compliance
    Lead Executive: Judith McNamara
    Description: IRC Section168 disposition regulations (Treas. Reg. Section 1.168(i)-8), issued August 2014, provide rules for recognizing gain or loss on the disposition of MACRS property and allow taxpayers to elect to recognize partial dispositions of property. To comply with the Section168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it:

1. disposed of a portion of a MACRS asset owned by the taxpayer;

2. identified the asset that was partially disposed;

3. determined the placed-in-service date of the partially disposed asset;

4. determined the adjusted basis of the disposed portion; and

5. reduced the adjusted basis of the asset by the disposed portion.

The goal of this campaign is to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components. The treatment stream for this campaign is issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.

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Calling it the largest sales suppression software case in state history, Washington State Attorney General Bob Ferguson announced the filing of criminal charges last week against the owner of six restaurants for allegedly using illicit point-of-sale software to delete cash transactions and pocket more than $5.6 million in sales tax. The charges include six counts of first-degree theft and three counts of possessing and using sales suppression software, commonly known as a “zapper,” which is illegal in the state of Washington. This case is yet another example of aggressive action undertaken recently by state authorities against zappers, and should serve as a stern warning to business owners making use of such technology.

Sales Suppression Software

Commonly called “zappers,” sales suppression software programs run on a point-of-sale computer or cash register and are used to secretly delete some or all of a restaurant’s cash transactions and then reconcile the books of the business. The result is that the company’s books appear to be complete and accurate, but are in fact false because they reflect fewer sales than were actually made. Business owners using zapper programs often maintain two sets of books, in order track the business’ real revenue. A recent article published by BNA estimates that tax-zapping software costs states $21 billion in taxes annually and that 30 percent of the electronic cash registers, or point-of-sale systems, in the United States have a zapper installed.

State of Washington v. Salvador Sahagun

According to the charging documents (available here, here, here, and here), the defendant, Salvador Sahagun, operated six restaurants in West Seattle, Broadway, Greenlake, Fremont, Lynnwood, and Marysville. During an audit, an auditor with the Washington State Department of Revenue found that point-of-sale records from these restaurants did not match with tax returns submitted by Sahagun. The auditor also found that the majority of sales receipts were missing from Sahagun’s point-of-sale system.

The press release announcing the charges notes that Department of Revenue employees, suspecting that Sahagun was using sales suppression software, visited the seven restaurants on several occasions and paid cash for their meals. The auditor then compared the employees’ receipts with the receipts on the point-of-sale system to determine whether the transactions existed and the amounts matched. The auditor found that three of the restaurants were using sales suppression software to delete or underreport cash transactions. The auditor determined that the other three locations also owed sales tax. The amount of taxes owed from each of the six locations ranged from $43,339 to $2,197,460. In total, the auditor determined that the owner owed $5,615,497 to the state.

State of Washington v. Yu-Ling Wong

While the case filed against Sahagun may be the largest in Washington state history, it is not the first. In February 2016, Washington’s Attorney General filed what he called the “first-of-its-kind” criminal case against a Bellevue restauranteur, Yu-Ling Wong, for using sales suppression software to avoid paying nearly $400,000 in state sales tax. That case began as a routine audit by the Washington State Department of Revenue, which trains its auditors to detect the use of revenue suppression software. Auditors noted an unusual change in cash receipts, as compared to the restaurant’s historical cash receipts, determined that the restaurant’s point-of-sale system could not be trusted, and eventually uncovered the use of Zapper software, which had been provided by a software salesman named John Yin. Yin worked for a Canadian company called Profitek, which sold point-of-sale systems for the hospitality and retail industries. The audit was thereafter referred for criminal prosecution, and the Washington Attorney General executed a search warrant at Yin’s residence. During a law enforcement interview conducted during execution of that search warrant, Yin admitted he sold the Zapper software in approximately 2007 and trained Wong in how to use it.

In August 2016, Wong pleaded guilty to first-degree theft and unlawful use of sales suppression software. The court ordered Wong to pay $300,000 in restitution to the Washington Department of Revenue. In addition, Wong’s business entered a corporate guilty plea to first-degree theft, unlawful use of sales suppression software, and filing a false or fraudulent tax return. In an unusual provision, both Wong and the business are subject to monitoring by the Department of Revenue for a period of five years.

United States v. John Yin

As a result of Washington’s investigation and prosecution of Yu-Ling Wong, the Justice Department announced federal criminal charges against John Yin in December 2016. According to the publicly-filed charging document and guilty plea agreement, Yin worked as a salesman for Profitek from at least 2009 through mid-2015. In addition to its Canadian headquarters, Profitek has offices in China and a growing dealership network across North America. Profitek designed, marketed, sold, and supported revenue suppression software (RSS) – commonly referred to as a “zapper” – as an “add-on” to its Profitek point-of-sale software. The RSS functioned only with the Profitek POS software.

Yin acknowledged in his guilty plea agreement that he successfully sold the POS software, and assisted in the widespread distribution of the Zapper add-on, to dozens of customers in and around Seattle over the course of several years. The Zapper software could only be ordered from a supplier in China, so Yin would put his clients in touch with the Chinese company and facilitate their purchase of the software. Yin also serviced the Zapper software once his clients purchased and installed it.

Yin further admitted that his clients’ use of Zapper software allowed them to consistently and significantly underpay their various federal, state, and local taxes, including business and occupation taxes, Social Security and Medicare taxes, and federal income taxes. The plea agreement stated that eight restaurants in the Seattle area were audited by the Washington State Department of Revenue and found to be using Yin’s Zapper software. The total amount of state sales and federal income taxes avoided by these establishments during the period 2010 through 2013 was $3,445,589.00.

Yin entered a guilty plea on December 2, 2016, to wire fraud and conspiracy to defraud the U.S. government. Yin agreed to make full restitution, in the amount of $3,445,589, to the IRS and Washington state. He was eventually sentenced to 18 months in prison.

Other States’ Efforts to Combat Zappers

Many states in addition to Washington have passed laws outlawing the use of revenue suppression software, including Michigan, Illinois, Connecticut, Florida, Georgia, Utah, and West Virginia, and others — like Mississippi — are considering proposals to enact such laws. The Washington state law, passed in 2013, makes it a class C felony for anyone to “sell, purchase, install, transfer, manufacture, create, design, update, repair, use, possess, or otherwise make available” software or hardware that deletes transactions.

While Washington state appears to be taking the lead in prosecuting business owners who use zappers, it is not alone in that effort. In December, Michigan Attorney General Bill Schuette announced that a sushi restaurant outside Detroit has been ordered to pay nearly $1 million in restitution and to serve a five-year sentence of probation for embezzling sales tax paid by customers and underreporting its income. The restaurant, Sushi Samurai Inc., entered a guilty plea and its owners, Dong and Christina Chang, also pleaded guilty to filing false monthly sales tax returns and filing false joint income tax returns.

In August 2017, the Illinois Attorney General announced that a Chicago restaurant owner was charged with underreporting sales by $1 million. The charges alleged that the defendant used a zapper to falsify electronic sales records in order to avoid paying the full amount of sales and use taxes owed each month. This case was the first zapper prosecution in Illinois, which banned sales suppression software and devices in 2013.

In July 2017, Connecticut’s Department of Revenue Services arrested and charged a New Haven restauranteur with various offenses for using sales tax suppression software. According to a press release announcing the charges, this was the first time the State of Connecticut has charged an individual for using “zapper” software.

Paging the Internal Revenue Service

Conspicuously absent from recent coverage of state efforts to detect, and prosecute, businesses and individuals who employ sales suppression technology is the Internal Revenue Service. Businesses that use zappers to avoid paying sales taxes are presumably underreporting their receipts for federal income tax purposes as well, thereby providing the IRS with an opportunity to at least audit income tax returns if not investigate potential federal tax crimes. Other than the federal prosecution of zapper salesman John Yin, however, the federal government does not appear to be playing a significant role (at least publicly) in the ever-widening crackdown on zappers by state lawmakers and prosecutors. In a few of the state cases, IRS agents appear to be playing no more than a supporting role to state investigators. While we expected a wave of federal prosecutions to follow the Yin case, so far that has not happened. One can only wonder whether the IRS will join the anti-zapper bandwagon or allow the states to continue to lead this fight.

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In CRI-Leslie, LLC, the Eleventh Circuit confronted whether a taxpayer is entitled to capital gains treatment for a forfeited deposit on the sale of land.  CRI-Leslie, LLC, Donald W. Wallace, Tax Matters Partner v. Commissioner, 11th Cir., No. 16-17424, February 15, 2018.  It is not a stretch to describe this area as “among the most frustrating in income tax law.”  Sirbo Holdings, Inc. v. Commissioner, 509 F.2d 1220, 1223 (2d Cir. 1975).

In 2005, CRI-Leslie paid almost $14 million for a hotel and restaurant in Tampa on prime waterfront property.  It planned to eventually sell the property, but it hired a third party to run everything in the meantime.  Over a year later, CRI-Leslie agreed to sell the property for around $39 million.  As part of the deal, CRI-Leslie received a $9.7 million nonrefundable deposit to be credited to the purchase price at closing.  But in 2008, the buyer fell through and forfeited the deposit.  CRI-Leslie reported the $9.7 million deposit as long-term capital gain.  The IRS disagreed, and argued that the Code allows capital gains treatment only for finalized sales, not forfeited deposits.

The case made its way to the Eleventh Circuit, which began its analysis with section 1231.  Section 1231(a) states that “any recognized gain on the sale or exchange of property used in the trade or business” is “treated as long-term capital gains.”  (Emphasis added).  Section 1231 also provides that the “term ‘property used in the trade or business’ means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year ….”  If CRI-Leslie had actually sold the property, the $9.7 million would have been taxed as long-term capital gain under section 1231.

But the deal never happened, so the tax treatment of the deposit was governed by section 1234A, not section 1231.  Section 1234 states that any gain or loss resulting from the termination of an agreement to buy property will still be treated as capital gain, if the property is a “capital asset” for the purposes of section 1234A.  Thus, the narrower issue was whether the hotel was a capital asset.

The Eleventh Circuit held that the answer could not be clearer based on a plain reading of the Code.  For the purposes of section 1234A, “the term ‘capital asset’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include … property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business.”  IRC § 1221(a)(2) (emphasis added).

The problem for CRI-Leslie was that it stipulated that the hotel was real property used in its trade or business.  The Eleven Circuit held that this concession by CRI-Leslie was fatal because “capital asset” does not include real property used in a trade or business under section 1221(a)(2).  That meant that the hotel was not a capital asset under section 1221, so section 1234A – the special rule that says that property from the termination of a contract for the sale of a “capital assets” is still subject to capital gains treatment – did not apply.  As a result, the Eleventh Circuit held that the $9.7 million forfeited deposit was taxable as ordinary income.

The Internal Revenue Service today warned taxpayers against scam groups masquerading as charitable organizations, luring people to make donations to groups or causes that don’t actually qualify for a tax deduction. These phony charities, which attempt to attract donations from unsuspecting contributors using a charitable reason and a tax deduction as bait for taxpayers are ranked fifth on the annual IRS “Dirty Dozen” list of tax scams. Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. To help protect taxpayers, the IRS-Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of today’s announcement from the IRS follows:

The IRS offers these basic tips to taxpayers making charitable donations:

• Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. has a search feature, Exempt Organizations Select Check, that allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy through the IRS Select Check.

• Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers to those seeking a donation. Confirm that those soliciting a donation are calling from a legitimate charity.

• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.

• Consult IRS Publication 526, Charitable Contributions, available on This free booklet describes the tax rules that apply to making tax-deductible donations. Among other things, it provides complete details on what records to keep to help taxpayers at tax time.

Impersonation of charitable organizations

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters.

The IRS encourages taxpayers to donate to recognized charities established to help disaster victims. Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

Scam artists can use a variety of tactics following a disaster. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

Remember, fraudsters may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.

Taxpayers can find legitimate and qualified charities with the Select Check search tool on

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