From the July 2007 issue of Entrepreneur

The IRS says it's battling tax evasion, money laundering and even the funding of terrorist groups by bogus companies with hidden owners. The problem of disguised corporate ownership made the IRS' annual "Dirty Dozen" list of biggest tax scams for 2007.

It's easy for business owners to conceal their identities. So how can you keep the IRS from mistaking your business for a sham? If you didn't list all the owners' names when you registered your business, you should update your incorporation papers, especially if you operate under these corporate structures:

  • Shell corporations: While legitimate shells provide an umbrella under which multiple businesses can file taxes jointly, bogus shells are created to hide income and conceal ownership, says Ronald G. Wainwright Jr., a tax managing director at RSM McGladrey Inc.
  • Partnerships and LLCs: Ownership of bogus partnerships and LLCs is concealed so owners can avoid paying income tax.
To avoid incorporation scams, be on guard against proposals to create a business that will only exist on paper. An advisor or business partner may tell you that such a structure would reduce your tax liability or enable you to write off personal expenses as business deductions. But that's untrue, and these filings could attract IRS attention.