IRS Cracks Down on Slavery Reparation Claims

Rep. Eddie Bernice Johnson has a simple message for all African Americans: Don’t be fooled. There is no tax break to compensate the descendants of slaves.

Tax frauds, ranging from bogus trusts to claims that Americans can “untax” themselves by renouncing their U.S. citizenship, proliferate during tax season, Internal Revenue Service officials said. But they’re multiplying at an alarming rate, spurring the IRS to action.

So-called slavery reparation claims, for example, soared to 80,000 in 2001 from 13,700 the year before, the IRS said.

The scam is most prevalent in the South--Georgia, Alabama, Arkansas, Louisiana and Florida--but it’s also ensnaring thousands of people in every state, with growing numbers in California, Pennsylvania, New Jersey and Indiana, IRS officials said.

Beginning in April, the IRS will treat slavery reparation claims like any other frivolous tax filing. That means taxpayers will get just one chance to withdraw these claims before they’re subject to a $500 penalty.

“We condemn those degenerates that would exploit a culture of Americans that is the least deserving of any more hardships,” said Johnson (D-Texas), chairwoman of the Congressional Black Caucus. “And we ask everyone to be alert and not get themselves in trouble. It is important not to file false [tax] claims.”

In addition, the IRS recently discovered 200 claims for nonexistent reparations for Native Americans.

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Using Church Groups

The agency suspects that promoters are marketing these bogus reparation claims through church organizations--a classic affinity scam technique. In affinity scams, promoters try to catch victims off guard by posing as a member of a trusted group.

“Promoters are shamelessly preying on people,” IRS Commissioner Charles O. Rossotti said in a statement last week. “These snake-oil salesmen build false hopes and charge people good money for bad advice.

“In the end, the victims discover their refund claims are rejected, and their money and the promoters are long gone.”

Promoters of the slavery reparations scam commonly charge taxpayers $50 to $100 to file a slavery reparation claim. However, some charge a percentage of the supposed refund amount--a figure that often amounts to thousands of dollars.

Rossotti said the IRS is attempting to get the word out in the next few months, hoping that the warning will prevent taxpayers from being taken in by the scam artists. As part of this outreach effort, IRS officials are contacting church groups and senior citizen organizations to explain the scam and discourage their members from participating.

The agency also is going on the offensive to ferret out reparation claims that already have been filed. The IRS’s 10 tax return processing centers have been alerted to the signs of a false reparation claim. The agency will penalize those who prepare, promote and participate in the scams.

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Offering ‘Secret’ Claim

The scam usually works like this: Promoters contact African Americans either in person or through advertisements, saying that the government is paying slavery reparation claims of $40,000 to $80,000.

Promoters urge these taxpayers to pay a fee and fill out forms to claim credits for “black investment taxes,” “black inheritance tax refunds” or “reparations for African Americans.”

Taxpayers who ask why they’ve never heard of these breaks are told that they’re a “secret” provision in the tax code that the “IRS doesn’t want you to know about,” IRS officials said.

Federal tax law, however, does not allow for such reparation claims and those who’ve made them have been penalized--sometimes jailed, IRS officials said.

Past enforcement actions have concentrated on the promoters, but the IRS said it soon will start penalizing participants.

For instance:

* On Friday, Vernon T. James of Carrollton, Texas, was sentenced to 78 months in prison and ordered to pay $1.2 million in restitution for preparing 10 returns that fraudulently claimed the “black investment tax.”

* Gregory Bridges, who told his Virginia clients they could take a “black tax credit,” was sentenced to 57 months in prison after being convicted on 22 counts of filing false returns in 1999.

* In 2000, the agency moved to seize a Florida preparer’s assets when she was discovered urging potential clients to deliver completed tax forms and a $100 money order so she could file bogus reparation claims on their behalf.

Recognizing that the taxpayers filing these claims often were victims themselves, the agency has been fairly lenient, IRS officials said. Although the IRS generally fines taxpayers who refuse to rescind frivolous tax returns, the agency didn’t fine those making slavery reparation claims unless they already had rejected two such claims from the same taxpayer.

But that leniency ends April 15. After that date, taxpayers will get just one chance to withdraw slavery reparation claims before they’re hit with a frivolous filing penalty of $500, the IRS said.

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Reparations Bill Stalled

There is a historical premise for the reparation claims. Congress passed a bill after the Civil War aimed at giving former slaves 40 acres of land and a mule to compensate them for their unpaid labor. However, the bill was vetoed by President Andrew Jackson and never became law.

Since then, the Congressional Black Caucus has had little success in getting slavery reparations discussed, much less paid, Johnson said. For the last 13 years, Rep. John Conyers (D-Michigan) has introduced legislation to study slavery reparations, but the bill has yet to make it out of committee hearings.

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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.