The IRS recently released its “Dirty Dozen”—an annual list of common tax scams that’s designed to educate taxpayers and help them avoid becoming a victim. Below, we discuss these scams so you can be aware of these common ruses and protect you and your business against fraudulent tax activity.
Abusive transactions are investments, businesses or tax strategies promoted by tax preparers or other parties that charge high fees in exchange for promised tax benefits. These transactions are on the IRS’s enforcement radar, and engaging in them could result in an audit or tax fraud charges.
Abusive transactions include:
Using a Charitable Remainder Annuity Trust (CRAT) to avoid taxable gains
In this transaction, taxpayers transfer appreciated property to a trust to get a stepped-up basis to fair market value. The CRAT sells the property without recognizing a gain and uses the proceeds to purchase an annuity. This scheme misapplies the law relating to CRATs.
Foreign pension arrangements misusing treaty
In these transactions, U.S. citizens and residents attempt to avoid U.S. tax by contributing to IRAs in Malta or other foreign countries. These accounts are improperly referred to as “pension funds” for U.S. tax treaty purposes, and the taxpayer claims that distributions from the fund are tax exempt.
Foreign captive insurance
U.S. business owners may engage in a captive insurance arrangement with a foreign corporation. The taxpayer then claims deductions for the cost of coverage. However, the insurance covers implausible risks, offers non-arm’s-length pricing or lacks a business purpose.
Monetized installment sales
These sales inappropriately take advantage of installment sale rules. The seller agreed to sell appreciated property to a buyer for cash, then sells the property to an intermediary in return for an installment note. The intermediary then sells the property to the buyer and receives the cash purchase price. The result is the seller gets the sales price, minus transaction fees, in the form of a non-recourse, unsecured loan.
Abusive syndicated conservation easements
Promoters of syndicated conservation easements use inflated appraisals of undeveloped land or historic buildings to claim grossly inflated tax deductions.
Micro-captive insurance arrangements
In abusive micro-captive insurance schemes, promoters convince business owners to participate in captive insurance arrangements that duplicate existing coverage or charge excessive premiums. These schemes are designed to avoid taxes rather than manage risk.
Scams to be Aware Of
The IRS warns taxpayers to be wary of the following scams that can include texts, emails, calls and social media posts.
Pandemic-related scams can take several forms, including:
- Economic Impact Payment (EIP) scams – Taxpayers may receive text messages, phone calls or emails requesting personal identification or financial information.
- Unemployment fraud – Scammers file fraudulent claims for unemployment benefits using stolen identities.
- Fake charities – Fake charities pose as genuine charitable organizations to solicit donations. Legitimate charities won’t pressure you to donate immediately or request assistance in the form of gift cards or wire transfers.
Here are some scams the IRS sees often.
- Text message scams – The IRS doesn’t use text messages or social media to discuss personal tax issues, initiate tax refunds or solicit tax payments.
- Email phishing – The IRS primarily communicates with taxpayers via mail and never asks for personal or financial information via email.
- Phone scams – The IRS doesn’t leave pre-recorded, urgent or threatening phone messages and doesn’t demand immediate payment via prepaid debit card, gift card or wire transfer.
Spear phishing targeting tax professionals
Tax professionals are common targets of spear phishing attacks seeking client information. Rest assured that Warren Averett takes security very seriously and trains all employees to recognize and avoid such scams. We also recommend that clients set safeguards in place to protect against spear phishing attacks.
They usually charge hefty fees, but taxpayers get the same deal they could get by working directly with the IRS. If you can’t pay your tax debt, check to see whether you’re eligible for an OIC using the IRS’s OIC pre-qualifier tool and work with a reputable professional if you need help with an OIC application.
Tax Avoidance Strategies for Individuals
In addition to all of the items above, the IRS wants taxpayers to be aware that they are monitoring the following items.
Cryptocurrency and offshore accounts
Owning cryptocurrency and maintaining foreign bank accounts isn’t a crime, but trying to avoid taxes by hiding assets is. If you own cryptocurrency or have a foreign bank account or investment, you must disclose it to the IRS and pay taxes on any resulting income.
Failing to file a tax return
The IRS actively pursues people who earn more than $100,000 per year and don’t file tax returns.
Learn More about Protecting Yourself and Your Business from Tax Scams
If you believe you’ve fallen victim to one of these ruses, or if you’d like to learn more about protecting yourself from tax scams, please contact your Warren Averett advisor or ask a member of our team to reach out to you.