Every year the IRS releases a “Dirty Dozen” list of tax scams which are at the forefront of their radar, and that we all need to be wary of. This list ranges from bad actors intent on stealing your money (a far cry from teaming up with Lee Marvin!) to less-than-honest ways of filing returns. These scams target higher-income filers and might get you into needless trouble.
- Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain:
Transferring appreciated property to a CRAT, the CRAT sells that property and uses the proceeds to buy an annuity, then the beneficiary doesn’t report the full amount as income.
- Maltese (or Other Foreign) Pension Arrangements Misusing Treaty:
This is when a U.S. citizen or U.S. resident makes contributions to certain foreign individual retirement arrangements in Malta (or other foreign countries). By improperly asserting the foreign arrangement is a “pension fund”, the U.S. taxpayer distorts the relevant treaty and wrongly claims an exemption from U.S. income tax on earnings in, and distributions from, the foreign arrangement.
- Puerto Rican and Other Foreign Captive Insurance:
In these transactions, U.S. owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner has a financial interest. The U.S.-based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation. The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered, non-arm’s-length pricing, and lack of business purpose for entering into the arrangement.
- Monetized Installment Sales:
These transactions involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans, but who files as if that money hasn’t come in yet.
- COVID-19 Scams:
These scams can take a variety of forms, including using unemployment information and fake job offers to steal money and information from people. All of these scams aim to try filing a fraudulent tax return and harm victims in other ways. Economic Impact Payment and tax refund scams continue to be a threat. Anybody trying to collect your bank account or SSN info to send you a stimulus payment is not from the IRS. Unemployment fraud leading to inaccurate taxpayer 1099-Gs is when you didn’t file for unemployment, but somebody stole your info and filed under your name. Be on the lookout for a Form 1099-G reporting unemployment compensation you didn’t receive. Fake employment offers posted on social media were and are a problem. These fake posts entice victims to provide their personal information. This creates added tax risk as this information can be used to file a fraudulent tax return for a refund or used in some other criminal endeavor. Fake charities that steal your money are always a problem. They tend to be a bigger threat when there is a national crisis like the pandemic. Remember, taxpayers must donate to a qualified charity to get a deduction. To check the status of a charity, use the IRS Tax Exempt Organization Search tool.
- Offer in Compromise (OIC) “mills”:
“No one can get a better deal for taxpayers than they can usually get for themselves by working directly with the IRS to resolve their tax issues,” said IRS Commissioner Chuck Rettig. OIC mills make outlandish claims, usually in local advertising, regarding how they can settle a person’s tax debt for pennies on the dollar. The reality is that taxpayers pay the OIC mill a fee to get the same deal they could have gotten on their own by working directly with the IRS.
- Suspicious communications in all their forms:
“If you are surprised or scared by a call or text, it’s likely a scam, so proceed with extreme caution,” said IRS Commissioner Chuck Rettig. Text message scams are sent to taxpayers’ phones and can reference things like COVID-19 and/or “stimulus payments.” These messages often contain bogus links claiming to be IRS websites or other online tools. Email phishing scams are easy to spot because the IRS does not initiate contact with taxpayers by email. The IRS initiates most contacts through regular mail. Finally, the IRS does not leave pre-recorded, urgent or threatening messages. In many variations of the Phone scam, victims are told if they do not call back, law-enforcement intervention is next. All phooey.
- Spear Phishing:
Spear phishing is an email scam that attempts to steal a tax professional’s software preparation credentials. They attempt to steal client data and tax preparers’ identities to file fraudulent tax returns for refunds. Spear phishing can be tailored to attack any type of company, so everyone should be on the lookout and not respond too quickly when a strange email comes in.
- Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets:
Uncle Sam gets his due, whether we like it or not. Hiding money overseas always gets caught, even if it takes a while. Cryptocurrency is no different. Unscrupulous promoters continue to perpetuate the myth that taxpayers can easily conceal their digital asset holdings.
- High-income individuals who don’t file tax returns:
The good news is most people file on time and pay their fair share of tax. Those who choose not to file a return even when they have a legal filing requirement, and especially those earning more than $100,000 per year who don’t file, represent a top priority of the IRS. Something to remember – the Failure to File Penalty is initially much higher than the Failure to Pay Penalty.
- Abusive Syndicated Conservation Easements:
This is when a promoter takes the law allowing for a conservation easement and inflates the appraisals of undeveloped land or facades of historic buildings, thereby falsely inflating tax deductions, usually for a high fee. If something sounds too good to be true, then it probably is.
- Abusive Micro-Captive Insurance Arrangements:
In abusive “micro-captive” structures, promoters, accountants, or wealth planners persuade privately held companies to participate in schemes that lack many of the attributes of true insurance. For example, coverages may “insure” implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages. The “premiums” paid under these arrangements are often excessive and are used to skirt the tax law.
The IRS has compiled the annual Dirty Dozen list for more than 20 years as a way of alerting taxpayers and the tax professional community about scams and schemes. The list is not a legal document or a literal listing of agency enforcement priorities. It is designed to raise awareness among a variety of audiences that may not always be aware of developments involving tax administration.
“Caution and awareness are our best lines of defense against these criminals,” IRS Commissioner Chuck Rettig says. “Everyone should verify information on a trusted government website, such as IRS.gov.”