Each year the IRS announces its list of common scams that taxpayers may encounter. Although many of the scams target average taxpayers, some are complex arrangements that specifically target higher income taxpayers. This year’s list includes eight potentially abusive schemes that are wrongfully promoted and target individuals who are looking for ways to avoid paying taxes. These schemes appear as items 1-4 and 9-12 on the list.

Solicitations for investment in the tax avoidance schemes are generally more targeted. The IRS has issued warnings to taxpayers to watch out for promoters peddling these tax avoidance schemes. The IRS has these schemes on its enforcement radar and they will likely attract additional agency compliance efforts in the future. In fact, earlier this year the IRS announced that it would be hiring up to 200 additional attorneys to combat abusive schemes.

The IRS has further warned that the agency continues to improve enforcement thanks to new and evolving data analytic tools and enhanced document matching. Tax avoidance schemes will result in not only the assessment of taxes and interest, but can lead to civil penalties of up to 75% and criminal charges. Be on the lookout so you do not fall prey to these scams and tax schemes and find yourself the subject of an IRS audit.

1. Charitable Remainer Annuity Trusts (CRAT): In this scheme appreciated property is transferred to a CRAT. The taxpayer claims that the transfer of the property to the CRAT results in a step up in the basis in the property to fair market value as if the property had been sold to the CRAT. The property is then sold by the CRAT and no tax is paid on the gain due to the step up in basis. The CRAT uses the sales proceeds to purchase a single premium immediate annuity. The beneficiary of the annuity then reports as income only a small portion of the annuity received and the remaining payment is treated as a return on investment for which no tax is due.

2. Maltese (or Other Foreign) Pension Arrangement: In this scheme US citizens/residents make contributions to certain foreign individual retirement arrangements in Malta (or other foreign countries) even though the US person has no connection to the foreign location. The law of the country where the retirement arrangement is established permits the pension contribution to be in a form other than cash, and does not define or limit the contribution to the pension by earned income or self-employment income. The foreign retirement arrangement is asserted to be a pension fund for US treaty purposes. By doing so, the earnings and distributions from the foreign pension arrangement are exempt from US income tax.

3. Puerto Rican (or Other Foreign) Captive Insurance: In this transaction US owners of closely held entities participate in an insurance arrangement with a Puerto Rican or other foreign corporation. These foreign entities will have a special insurance arrangement or segregated asset plans in which the US owner has a financial interest. The US entity will then claim a deduction for the cost of insurance provided by a carrier which reinsures the insurance coverage with the foreign corporation. The main characteristics of these alleged insurance arrangements include the coverage of implausible risks, non-arm’s length pricing and lack of a business purpose for entering into the arrangement.

4. Monetized Installment Sales: Although the law provides for installment sales, in this scheme the owner of appreciated property enters into a contract with a buyer to sell the property for cash. The owner then allegedly sells the same property to an intermediary in return for an installment note. The intermediary then sells the property to the original buyer and receives the cash sales price. The original seller then receives the sales prices, less transaction fees, in the form of a loan that is nonrecourse and unsecured.

5. COVID Pandemic Scams: Thieves and scammers are still using the pandemic to scare and confuse people into handing over money and personal information through the use of fake e-mails, social media posts, and unexpected phone calls and texts. As a reminder:

• The IRS never reaches out to taxpayers by e-mail, texts, phone calls or social media. All initial communication will be by mail delivered by the United States Post Office.
• The IRS will not ask you for personal information such as your social security number. The IRS already has that information.
• The IRS will not request you to click on a link to verify personal or bank account information. These e-mails or texts should be considered suspicious and deleted without opening.
• The IRS has issued all stimulus payments. If you have not received your stimulus payment or received only a portion of the payment, review your returns for 2020 and 2021 to see if the credit has been properly claimed or contact the IRS directly for further information. Anyone reaching out regarding stimulus payments is most likely a scammer.
• Thieves used stolen personal information to claim unemployment benefits during the pandemic. If you received a 1099-G reporting unemployment benefits which were not yours, reach out to your state unemployment agency. For more information go to: https://www.irs.gov/identity-theft-fraud-scams/identity-theft-and-unemployment-benefits
• Beware of fake job postings on social media. These sites ask you to provide your personal information such as social security number and date of birth. This information can be used to steal your identity. Make sure you are dealing with a legitimate employer.
• Beware of fake charity scams. For more information go to: https://magdaabdogomezlaw.com/tips-protecting-making-charitable-contributions/

6. Offer in Compromise Mills and Unscrupulous Tax Preparers: You have seen the commercials on television or heard them on the radio. Offer in compromise mills make claims that they can settle a tax debt for pennies on the dollar. The truth of the matter is that per the IRS (and in this writer’s experience with clients who have used these companies) “these ‘mills’ contort the IRS program into something it’s not — misleading people with no chance of meeting the requirements while charging excessive fees, often thousands of dollars”.

Unscrupulous tax preparers are also a problem.  Beware of ghost prepares and those who promise inflated refunds. For more information on spotting unscrupulous tax preparers go to: https://magdaabdogomezlaw.com/choosing-a-tax-return-preparer/

7. Suspicious Communications: Communications designed to either trick, surprise or scare someone into responding before thinking. Criminals have used these methods for years and they persist because these tricks work enough times to keep the scammers at it. Victims are tricked into providing sensitive personal financial information, money or other information. This can be used to file false tax returns and tap into financial accounts, among other schemes. Familiarize yourself with scam alerts issued by the IRS in the past by going to: https://magdaabdogomezlaw.com/category/irs-scam-alerts/

8. Spear Phishing: This is an email scam that attempts to steal a tax professional’s software preparation credentials. Thieves try to steal client data and tax preparers’ identities in an attempt to file fraudulent tax returns for refunds. Spear phishing can be tailored to attack any type of business or organization with a client data base, so everyone needs to be on the lookout and not rush to act when a strange email comes in.

The latest phishing e-mail uses the IRS logo and subject lines such as “Action Required: Your account has now been put on hold”. Other e-mails offer an “Unusual activity report” and provide a link in order to solve the problem and restore the account.  These e-mails are scams.

9. Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets: US persons are taxed on worldwide income. Depositing funds in an offshore account does not put it out of reach of the US tax system. US persons are required, under penalty of perjury, to report income from offshore funds and other foreign holdings. The IRS uses a variety of sources to identify promoters who encourage others to hide their assets overseas. The IRS is focused on stopping tax avoidance by those taxpayers who hide assets in offshore accounts and is able to identify and track anonymous transactions of international accounts.

Unscrupulous promoters will assert that taxpayers can conceal digital asset holdings. Do not be misled. Many cryptocurrency exchanges report transactions directly to the IRS. The IRS has used subpoenas to obtain information on cryptocurrency transactions. Additionally, with help from blockchain companies, the IRS is using advanced data analysis, pattern recognition, and machine learning to identify suspicious activity across cryptocurrency exchanges. Failure to report transactions involving digital assets that are required to be reported can lead to civil penalties and/or criminal charges.

10. Failure to File Returns: The IRS continues to focus on taxpayers who do not file a tax return, especially those individuals earning more than $100,000 a year. There is a civil penalty of up to 25% for failure to file a return. If the failure to file the return is fraudulent the penalty can increase to 75%. Failure to file a return is also a crime.

11. Abusive Syndicated Conservation Easements: Although the law does allow conservation easements, in this scheme the undeveloped land or the façades of historic buildings are appraised at inflated values and partnership arrangements having no legitimate purpose are used. The arrangement results in grossly inflated tax deductions.

The IRS has devoted a lot of resources and staff hours to addressing this issue. The IRS has examined 100% of these deals and has plans to continue to do so. Many of the cases involving this scheme have gone to court and many more are expected to end up in court. Although taxpayers have prevailed on some of these cases, including in the 11^th Circuit (remanded to Tax Court), the IRS will continue to aggressively pursue this issue. For more information go to: https://www.forbes.com/sites/irswatch/2020/12/17/courts-are-deciding-some-conservation-easement-cases-in-favor-of-taxpayersat-least-in-part-is-it-time-to-rethink-settlement/?sh=4edc2d602770

https://news.bloombergtax.com/daily-tax-report/the-eleventh-circuit-court-of-appeals-the-current-focus-for-conservation-easements

12. Abusive Micro-Captive Insurance Arrangements: In these arrangements, promoters, including wealth planners, convince owners of closely held entities to participate in schemes that lack the usual attributes of insurance. For example, the insurance coverage may insure implausible risks, the coverage may duplicate the taxpayer’s commercial insurance coverage or there may be no business need for the coverage. The premiums paid for the coverage are excessive.

These transactions are a high priority issue for the IRS. The IRS’ position regarding these arrangements has been sustained on the merits by the Tax Court in every case. On May 12, 2022, the first appellate decision was issued by the 10^th Circuit Court of Appeals. The appellate court upheld the IRS’ position that micro-captive insurance arrangements are a sham. For more information go to: https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010110683986.pdf