“Dirty Dozen” schemes target taxpayers. It comprises aggressive and developing tactics that taxpayers should avoid. This year’s “Dirty Dozen” tax scams:
CRAT eliminates taxable gain.
Appreciated property is transferred to a CRAT. Taxpayers incorrectly assert that transferring appreciated assets to a CRAT increases their basis to fair market value as if they were transferred to the trust. The CRAT sells the property but recognizes no gain owing to the base step-up. The CRAT buys a single-premium instant annuity using the profits (SPIA). Only a fraction of the SPIA annuity is reported as income. Misapplying CRAT rules, the recipient regards the remaining money as a tax-free investment return.
Maltese (or foreign) pensions Treason
U.S. citizens or residents avoid U.S. tax by contributing to foreign IRAs in Malta (or possibly other foreign countries). These transactions lack a local relationship. Local legislation enables non-cash contributions or does not restrict contributions based on work or self-employment income. By mischaracterizing the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer claims an exemption from U.S. income tax on revenues and distributions from the foreign arrangement.
Foreign captive insurance in Puerto Rico
U.S. shareholders of tightly held corporations join in a supposed insurance agreement with a Puerto Rican or other foreign firm using cell arrangements or segregated asset plans. The U.S. person or business claims deductions for “insurance coverage” supplied by a fronting carrier, which reinsures with the foreign firm. The putative insurance agreements have unrealistic risks covered, non-arm’s-length pricing, and no commercial purpose.
These agreements include a seller who obtains the sales profits via supposed loans in the year of a property sale. In a typical transaction, the seller agrees to sell appreciated property to a buyer for cash and then to an intermediary for an installment note. The middleman pretends to sell the property and collects the cash. The seller gets the sales price, minus transaction costs, in the form of a non-recourse, unsecured loan.
EIP and tax refund frauds. Identity thieves who employ Economic Impact Payments (EIPs) are an ongoing danger. Most qualified persons have received Economic Impact Payments from the IRS.
Fraudulent 1099-Gs due to unemployment. During the epidemic, many taxpayers lost jobs and got unemployment. Scammers used stolen personal information to create false jobless claims. Look out for Form 1099-G reporting unpaid unemployment payments.
Social media fake jobs. Social media has numerous fraudulent job advertisements. These false postings lure victims to disclose personal financial information that may be used to file a bogus tax return or for another crime.
Fake charity scams. False charities are an issue. Use IRS Tax Exempt Organization Search to verify a charity’s status. Callers shouldn’t push people. A genuine charity will accept a contribution at any time, so there’s no urgency, and contributors should do their homework.
An “offer,” or OIC, addresses a taxpayer’s tax burden. The IRS may “compromise” federal tax bills by accepting less than full payment. OIC mills are a problem all year but are particularly obvious after filing season, when taxpayers are attempting to address tax difficulties after getting a balance owing notification. These “mills” deceive individuals with little prospect of fulfilling standards while demanding thousands of dollars in fees. They advertise locally that they can settle tax debt for pennies on the dollar. Taxpayers pay the OIC mill a charge to receive the same deal they might have gotten straight from the IRS.
Unscrupulous tax preparers include OIC mills. Beware of “ghost” preparers and pushy refund promises.
Ghost-preparers. Taxpayers should be aware of ghost preparers, who don’t sign their tax returns. “Ghost” prepares e-filed returns but won’t digitally sign as the paid preparer. By law, anybody who prepares or helps prepare federal tax returns must obtain a PTIN (PTIN). Paid preparers must sign and provide PTIN.
Refunds inflated. Not signing a return indicates that the paid preparer may be attempting to make a fast profit by promising a high refund or collecting refund-based costs. Unscrupulous tax preparers may request cash only and not offer a receipt, manufacture income to qualify customers for tax credits, claim bogus deductions to enhance the refund, or put payments into their bank account, not the taxpayer’s.
Identity, financial, and money-stealing scams
Criminals have utilized phishing for years. Victims are deceived into submitting sensitive financial information, money, or other information that may be used to file bogus tax returns and access bank accounts. Text messaging, email phishing, and phone calls are frequent IRS frauds. The IRS sends tax debtors a bill first. Only the U.S. Treasury should receive tax payments; never other parties. If you don’t owe taxes, don’t give out any information. Hang up on unsolicited, questionable, or unexpected text messages from the IRS, state tax agency, or anyone in the tax community.
Spear phishing steals tax professionals’ software preparation credentials through email. Thieves steal customer data and tax preparer identities to submit bogus tax returns. Spear phishing may target any company. It may be used to steal computer system credentials from any small company having a customer database, such as tax businesses. The new phishing email utilizes the IRS logo and subject lines like “Your account has been suspended.” These phishing emails direct consumers to a website with tax software logos. Clicking one of these icons will seek tax preparer credentials.
Digital Assets and Offshore Accounts
Accounts offshore. Numerous people have been caught dodging U.S. taxes by hiding income in overseas banks, brokerage accounts, or nominee businesses. Then they use debit cards, credit cards, wire transfers, or other methods. Some people utilize foreign trusts, employee leasing schemes, private annuities, and sophisticated transactions to hide account or insurance plan owners.
The U.S. taxes global revenue. Money in an offshore account is subject to U.S. taxation. U.S. citizens must declare overseas income under penalty of perjury. The IRS utilizes many sources to identify promoters who advocate asset hiding abroad.
Data. The rise of digital assets in the previous decade has caused tax administration issues, partially because of the misconception that digital asset accounts are undetected by tax authorities. Unscrupulous advocates claim taxpayers may simply hide digital assets. Taxpayers who fail to declare digital asset transfers might face civil fraud fines and criminal prosecution.
Most individuals file on time and pay their taxes, but those who don’t pose an IRS compliance concern. Taxpayers (particularly those earning over $100,000 per year who must file) may think not filing is wise. The Failure to File Penalty is greater than the Failure to Pay a Penalty. Filing an accurate return on time and setting up a payment plan if required is preferable to not filing. If a person’s failure to file is found fraudulent, the penalty rises from 5% to 15% for the month or portion of a month the return is late, with a maximum of 25% to 75%.
Abusive conservation easements
In syndicated conservation easements, marketers use overstated property valuations to twist a tax rule authorizing conservation easements (or, for a few specialized ones, the facades of historic buildings). They may also employ sham partnerships. These unethical arrangements overstate tax deductions and create hefty fees for promoters. 100% of these trades are examined by the IRS, and hundreds have been litigated.
Micro-captive insurance abuse
In abusive “micro-captive” schemes, promoters, accountants, or wealth planners entice owners of closely-held firms to join. Coverages may “insure” improbable risks, fail to meet company requirements or duplicate taxpayers’ commercial coverages. These agreements utilize exorbitant “premiums” to avoid taxes. The IRS has recently increased action against offshore captive insurance businesses. Micro-captive transactions remain a priority.
This list is not exhaustive, but it shows some of the most prevalent patterns and transactions that may peak during tax filing season. Transactions that look “too good to be true” should be avoided. If you’ve been scammed, notify the office immediately.