Every year the IRS releases a list of “Dirty Dozen” tax scams for taxpayers to avoid. The list brings awareness to taxpayers, tax professionals, and financial institutions about new developments in the world of tax administration.
These tax scams can occur at any time in the year; however, the IRS notices a surge during filing season. This year’s 12-point list includes potentially abusive behaviors, consumer-level frauds, and high-net-worth solicitations.
1. Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain
This is when an appreciated property is transferred to a CRAT, and the owner improperly claims the transfer of the appreciated assets, so they act as a step-up to the fair market value. The CRAT sells the property, but the gain is not recognized because of the claimed step-up.
The CRAT uses the proceeds to purchase a single premium immediate annuity (SPIA). Then, the beneficiary reports just a portion of the annuity from the SPIA. By misapplying the law related to CRATs, the beneficiary positions the remaining payment to be an excluded portion serving as a return on investment on which no tax is due.
2. Maltese (or Other Foreign) Pension Arrangements Misusing Treaty
This is when U.S. citizens or residents try to avoid paying U.S. taxes by contributing to certain foreign individual retirement arrangements in Malta and perhaps other countries. Often, the individual does not have a local connection. However, local law permits non-cash contributions and does not limit the number of contributions. The individual then fraudulently asserts the foreign arrangement as a “pension fund” for U.S. tax treaty purposes.
3. Puerto Rican and Other Foreign Captive Insurance
This is when U.S. owners of closely held entities develop insurance arrangements with Puerto Rican or other foreign corporations with cell arrangements or segregated asset plans that are of financial interest to the U.S. owner. The owner claims deductions for the cost of questionable “insurance coverage” provided by a middleman. The middleman then reinsures the “coverage” with the foreign corporation. Telltale signs of these sketchy insurance arrangements include implausible risks covered, non-arm’s-length pricing, and lack of business purpose for entering into the arrangement.
4. Monetized Installment Sales
This is when installment sales rules under Section 453 are improperly used by a seller seeking to disguise sales proceeds as purported loans. The seller signs a contract to sell the appreciated property to a buyer for cash. The seller then purports to sell the same property to an intermediary in exchange for an installment note. Then, the intermediary purports to sell the property to the buyer and gets the cash purchase price.
5. Pandemic-Related Scams
Be aware of scammers who continue to use the COVID-19 pandemic as a way of stealing identities and funds through fraudulent emails, online posts, and phone calls. These scams include unemployment information and fake job offers, which are used to steal an individual’s sensitive personal information such as Social Security numbers, date of birth, etc. The scammer will then take this information to try to file a fraudulent tax return.
6. Avoid Offer in Compromise (OIC) Mills
The IRS encourages taxpayers with pending tax bills to contact them directly, as opposed to going through unscrupulous tax companies that falsely claim they can resolve unpaid taxes for pennies on the dollar. These are known as Offer in Compromise (OIC) “mills” and they offer misleading and inaccurate tax advice, which can cost a taxpayer time and money. The IRS has its own Offer in Compromise Pre-Qualifier tool.
7. Suspicious Communications
There’s no end to the various forms of communication criminals use to mislead victims into giving out personal information and money. Be skeptical of calls, texts, emails, and other online posts that solicit your personal or financial information.
The IRS does not request personal info via email, text message or social media and they don’t send pre-recorded voice messages to phones. You can report suspected fraudulent messages you receive from entities purporting to be the IRS to firstname.lastname@example.org.
8. Spear Phishing Attacks
Spear phishing attacks are concerning because a scammer can attack your personal computer/device or perhaps even your company’s entire computer network. The scammers send emails or other messages indicating that the receiver has been locked out of an account. They then tell the victims they need to send their login credentials to regain access to the account. It’s a best practice to ignore these emails and report them to email@example.com.
9. Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets
The IRS is focused on preventing people from using offshore accounts and improperly reporting digital assets (cryptocurrency) to avoid paying required taxes. Funds by U.S. persons stored in offshore accounts are still subject to IRS oversight and regulation. Sketchy transactions conducted using cryptocurrency will likely also raise some red flags with the IRS and potentially even other agencies.
10. High-income Individuals Who Don’t File Tax Returns
Pursuing tax dodgers who earn more than $100,000 each year has become a top priority of the IRS. High-earners who fail to adequately file tax returns on time can be assessed both a Failure to File Penalty and a Failure to Pay Penalty, which both come with hefty fines.
11. Abusive Syndicated Conservation Easements
In the world of syndicated conservation easements, some will abuse the system by using a provision from the law to inflate appraisals of undeveloped land and use partnership arrangements that lack a legitimate business purpose. This practice allows abusers to grossly inflate their deductions and avoid paying what’s due in taxes — sometimes as much as millions of dollars.
12. Abusive Micro-Captive Insurance Arrangements
Be aware of shady insurance arrangements that lack many attributes of legitimate insurance arrangements. These arrangements might include coverage that “insures” implausible risks, fails to match genuine business needs, or duplicates previous coverage. The “premiums” paid under these arrangements are excessive and an attempt to avoid taxes.
Consult an Expert Tax Advisor with Questions
If you have encountered any of the Dirty Dozen tax scams, it’s best to consult an expert tax advisor who can lay out the potential consequences. Taxpayers who have already claimed benefits as a result of one of these scams may need to take corrective action; 1-800Accountant can advise taxpayers in this situation as to what steps should be taken, such as filing an amended return.
For questions regarding the IRS’s Dirty Dozen tax scams, contact our team here at 1-800Accountant.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.