If you spent March wracking your brain for ways to keep Uncle Sam's paws off your cash, you're not alone. "Nobody likes to pay taxes," says Keith Blair, an assistant professor of law at University of Baltimore and former trial attorney for the U.S. Department of Justice's tax division. The bad news: "Generally, if you have earned income of some sort, you're going to have to pay."
The single biggest tax-cheating act: "under-reporting income," says Towson-based Mark Edward Kell, a former IRS auditor and current tax attorney. "You wouldn't believe how common it is."
Some taxpayers get creative in trying to work within existing rules. One area tax expert who asked to remain anonymous recalls a potential client who wanted to deduct the depreciation of her breast augmentation. The woman, an exotic dancer, argued that her new, er, assets were a business investment. "She felt that she should have been able to defray some of the cost of the improvement," says the accountant, who didn't end up representing the client—but figures the argument wouldn't have been a hit with the IRS.
There also are a host of established schemes the IRS encounters. On the more dramatic side are claims that income taxes are unconstitutional, says Blair. Ditto for claiming you can't be taxed because you're a sovereign entity. "I've had people say they are citizens of the sovereign kingdom of Hawaii and therefore the tax doesn't apply to them," says Jack Snyder, a clinical fellow at University of Baltimore and former trial attorney for the U.S. department of Justice's tax division. "I had one case in which the guy tried to prevent the IRS from going after his house by positing that his house was an embassy."
Another common scheme, often favored by the wealthy: shielding assets by transferring them to a trust. "Sometimes it will have a name like the None of Your Business Family Holding Trust," says Snyder, who points out that if the taxpayer maintains control over the assets, the government almost always prevails.
