The Internal Revenue Service announced its annual "Dirty Dozen" list of tax scams in June 2022...

All tax scams put taxpayers at risk. This year, criminals continue to exploit the pandemic and related relief programs, including the rise in unemployment benefits activity as well as Economic Impact Payments. Listed below are the scams in this year’s Dirty Dozen.

Abusive Monetized Installment Sales: When a seller enters into a contract to sell appreciated property to a buyer for cash, a tax avoidance tactic promoted may be to sell the same property to an intermediary in return for an installment note, so the seller receives an amount equivalent to the sales price, less various transactional fees, in the form of an unsecured loan. The IRS is reviewing these types of transactions carefully as potential for fraud.¹

Puerto Rican and Other Foreign Captive Insurance: While insurance is an essential protection for businesses, the IRS has identified situations where a U.S. based individual or entity claims deductions for the cost of unnecessary or questionably priced "insurance coverage" provided by a fronting carrier which reinsures the "coverage" with a Puerto Rican or other foreign corporation using cell arrangements or segregated asset plans in which the U.S. owner has a financial interest.¹

Misuse of Maltese (or Other Foreign) Pension Arrangements: U.S. citizens or U.S. residents making contributions to certain foreign individual retirement arrangements in Malta or possibly other foreign countries may find themselves under IRS scrutiny. When an individual has no local connection, they may be improperly characterizing the arrangement as a "pension fund" for U.S. tax treaty purposes. ¹

Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain: Transferring appreciated property to a CRAT provides a step-up in basis to fair market value as if the property had been sold to the trust. If the CRAT then sells the property without recognizing the gain due to purchase a single premium immediate annuity (SPIA) with the original property owner as a beneficiary, and they only report a fraction of the annuity received from the SPIA as income, with the remainder excluded as a return of investment, this is a misapplication of the rules which could create penalties for the beneficiary.¹

Continued schemes related to Covid-19 Economic Impact Payments and unemployemnt fraud: This year, criminals continue to exploit the current crises to obtain personal data which can be used to file fradulent unemployment insurance claims or tax refunds. The IRS has issued all Economic Impact Payments. Most eligible people already received their stimulus payments, but people who are missing a stimulus payment or got less than the full amount may be eligible to claim a Recovery Rebate Credit on their 2020 or 2021 federal tax return. Always use IRS.gov, the agency’s official website for information on payments, refunds and other tax information.²

During the pandemic, many taxpayers lost their jobs and received unemployment compensation from their state. Identity thieves took advantage of this situation, filing fraudulent unemployment claims for individuals who had not filed. Taxpayers should be on the lookout for a Form 1099-G reporting unemployment compensation they did not request or receive, and if any issues are discovered they can review the Identity Theft and Unemployment Benefits for tax details and DOL.gov/fraud for state-by-state reporting information.²

As many Americans engage in job searches during the aftermath of the social changes surrounding the last 2 years, online job postings through social media have been popular. Be wary of any posting which requests personal TAX ID’s or financial information as part of the application process. Bogus Charities have also become active in areas of Covid Relief support - carefully review the organization before making a donation, especially when receiving an unsolicited call or text.²

Offer in Compromise mills: Taxpayers need to be cautious of misleading tax debt resolution companies that can exaggerate chances to settle tax debts for "pennies on the dollar" through an Offer in Compromise. Dishonest companies oversell the program to unqualified candidates so they can collect a large fee from taxpayers already struggling with debt. These "OIC mills" are one example of unscrupulous tax preparers which include "ghost preparers," so named by their practice of not signing returns. These preparers will often make promises of bigger than expected refunds, possibly achieved by fraudulent means for which the taxpayer bears responsibility.³

Bogus calls, texts, emails, and posts: Preying upon fear or confusion, these methods have been used for years. They trick victims into revealing personal data by linking a current event such as pandemic stimulus checks to a promise of tax refunds or a threat of outstanding tax collection. Sensitive personal or financial information revealed by the victim can then be used to file false tax returns and tap into financial accounts, or simply swindle people out of their money. Be aware that the IRS does not use text messages to discuss tax bills or refunds and does not send taxpayers messages via social media.⁴

Spear Phishing Attacks: Spear phishing target tax preparers via email scams that attempt to steal software preparation credentials and client data using official looking emails with subject lines such as "Action Required: Your account has now been put on hold" or "unusual activity report" and a link for the recipient to restore their account. This tactic can be tailored to attack any type of business or organization, so everyone needs to be on the lookout and not rush to act when a strange email comes in.⁵

Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets: These tax avoidance strategies which offer too-good-to-be-true promises of reducing taxes or avoiding taxes altogether could land the taxpayer in a legal mess. U.S. persons are required, under penalty of perjury, to report income from offshore funds and other foreign holdings as well as digital assets received, sold, exchanged, gifted, or otherwise disposed of. The IRS uses a variety of sources to identify promoters who encourage others to hide their assets overseas or in digital assets.⁶

High-income individuals who don’t file tax returns: The Failure to File Penalty is generally higher than the Failure to Pay Penalty. Individuals choosing not to file a return even when they have a legal filing requirement, especially those earning more than $100,000 per year, are a top priority of the IRS.⁶

Abusive Syndicated Conservation Easements: The abuse of conservation easements involves inflated appraisals of undeveloped land and occasionally historic buildings, combined with partnership arrangements lacking a legitimate business purpose. The IRS has examined every one of these deals in the last 5 years, and hundreds of these deals have gone to court. They expect to continue doing so for the foreseeable future.⁶

Abusive Micro-Captive Insurance Arrangements: Abusive insurance deductions involve coverages which "insure" unlikely or unnecessary risks, or which duplicate the taxpayer’s commercial coverages. Premiums paid under these arrangements are often excessive. The IRS has agressively investigated these arrangements, and has won all micro-captive Tax Court and appellate court cases, decided on their merits, since 2017.⁶

Citations.

1 - https://www.irs.gov/newsroom/irs-warns-taxpayers-of-dirty-dozen-tax-scams-for-2022

2 - https://www.irs.gov/newsroom/irs-continues-with-dirty-dozen-this-week-urging-taxpayers-to-continue-watching-out-for-pandemic-related-scams-including-theft-of-benefits-and-bogus-social-media-posts

3 - https://www.irs.gov/newsroom/dirty-dozen-irs-urges-anyone-having-trouble-paying-their-taxes-to-avoid-anyone-claiming-they-can-settle-tax-debt-for-pennies-on-the-dollar-known-as-oic-mills

4 - https://www.irs.gov/newsroom/dirty-dozen-scammers-use-every-trick-in-their-communication-arsenal-to-steal-your-identity-personal-financial-information-money-and-more

5 - https://www.irs.gov/newsroom/dirty-dozen-irs-security-summit-reiterate-recent-warning-to-tax-professionals-and-other-businesses-of-dangerous-spear-phishing-attacks

6 - https://www.irs.gov/newsroom/irs-wraps-up-2022-dirty-dozen-scams-list-agency-urges-taxpayers-to-watch-out-for-tax-avoidance-strategies