The IRS Announces “Dirty Dozen” Tax Scams for 2022
Transcript of Podcast Episode 186
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, the IRS has once again released its “dirty dozen” tax scams.
Every year at around this time, the Internal Revenue Service releases its annual list of tax scams. The new list is fresh off the presses. As usual, there are some new scams to be on the lookout for. It seems scammers have become more sophisticated in recent years. Gone are many of the basic scams, such as padded deductions and inflated refund claims. They’ve been replaced by some far more sophisticated scams.
Here they are, in order.
1. Use of a Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain
A CRAT is an arrangement where a donor contributes assets to a charitable trust that then pays a fixed income, usually back to the donor, for a period of time. The assets left in the trust at the end of the term go to charity. The donor receives an up-front tax deduction for the amount that is left to the charity. While the trust is a tax-exempt entity, the income payment back to the donor is potentially taxable income based upon a four-tier tax system.
CRATs are a perfectly legitimate planning technique for wealthier taxpayers who are also charitably inclined. But they can be abused. In this case, the IRS is referring specifically to cases where someone transfers appreciated asset to a CRAT and applies a step-up in basis to fair market value as if the appreciated asset had been sold to the trust. The CRAT then sells the asset but does not recognize gain due to the claimed step up in basis and using a single premium immediate annuity. The beneficiary reports, as income, only a small portion of the annuity received from the SPIA. Through a misapplication of the law relating to CRATs, the beneficiary treats the remaining payment as an excluded portion representing a return of investment for which no tax is due. Taxpayers seek to achieve this inaccurate result by misapplying the rules under sections 72 and 664..
2. Maltese (or Other Foreign) Pension Arrangements Misusing Treaty
Although the IRS specifically cites the island of Malta, this could apply to several foreign countries. What they describe is a situation where a U.S. citizen will make contributions to a foreign retirement plan, even though the taxpayer has no connection to the country in question. As the IRS describes it, by improperly claiming that the foreign arrangement is a “pension fund” for U.S. tax treaty purposes, the taxpayer wrongly claims an exemption from U.S. income tax on earnings and distributions from the foreign account.
3. Puerto Rican and Other Foreign Captive Insurance
A captive insurance company is generally a separate company created by the parent operating company to provide property and casualty and other types of risk insurance for its parent company or a group of related companies. These arrangements are authorized by the Internal Revenue Code when done correctly. They are typically used when the parent company can’t get the insurance they want from a commercial insurance carrier, or the premiums paid or deductibles to the commercial insurance carrier are too high. Captive insurance companies may also create tax savings.
In this case, the IRS is concerned with Puerto Rican or other foreign corporations being used by U.S. business owners as insurance or reinsurance carriers to create tax deductions for the payment of expenses for business insurance that cover implausible risks, without any arm’s-length pricing, and a lack of any real business purpose.
4. Monetized Installment Sales
Sellers can defer capital gains when they sell an asset on an individual basis under Internal Revenue Code Section 453. The IRS goes into detail describing a scenario where a third-party intermediary gets involved. The intermediary will send an amount equivalent to the sales price to the seller in the form of a purported loan that is unsecured. The claim is to turn a cash sale—with limited tax benefits—into an installment sale.
5. COVID-19 Schemes
This one has been out there for several years. The IRS specifically cites scams involving stimulus payments which use text messages, phone calls or emails. They also talk about unemployment fraud, where criminals take advantage of pandemic-related job losses by filing fraudulent claims, often without the taxpayer’s knowledge. They also mention fake employment offers which are posted on social media. The scammer will then collect financial information that can be used to file a fake tax return. And they also mention phony charities that can be used to steal your money.
6. Unscrupulous Tax Preparers
We’ve seen this one before from the IRS. Their suggestion is that if you have a pending tax bill, you should contact the IRS directly, and not go to “unscrupulous tax companies that use local advertising and falsely claim they can resolve unpaid taxes.” They specifically cite what they refer to as “Offer in Compromise mills,” which advertise outlandish claims about how they can settle a person’s tax debt.
7. Bogus Communications
This has been an issue for many years. Crooks have been using fake phone calls, texts, emails and online posts for years to gain your trust and steal from you. As the IRS says, they keep doing this because these tricks work well enough to keep on going. As they remind us, most of the time the IRS makes their initial contact through regular mail.
8. Spear Phishing
This is a new one. “Spear phishing” is an email attack that unlike regular phishing, is targeted at a specific individuals. The IRS points out that the email scam are tailored to attack and steal the computer system credentials of any small business, with a special concern over tax professionals. They have seen recent phishing emails where the criminal uses the IRS logo and subject lines such as “Action Required: Your account has now been put on hold.”
9. Concealing Assets Offshore and Improper Reporting of Digital Assets
According to the IRS, they have identified many people who attempt to evade taxes by trying to hide income in offshore banks and brokerage accounts. U.S. taxpayers are taxed on worldwide income. They also point out that the increase in digital assets, including cryptocurrency, across the world has created issues, in part because of an incorrect belief that digital asset accounts are out of the IRS’s reach. They are not.
10. High-Income Individuals Who Don’t File Tax Returns
This one is an oldie but a goodie. The IRS points out that there are severe penalties for those who don’t file their returns, and that finding these people, especially individuals earning more than $100,000 a year, is one of their top priorities.
11. Abusive Syndicated Conservation Easements
This one is mouthful, but the IRS has brought it up before. A conservation easement is a voluntary agreement that permanently limits the use of a piece of real estate to protect its conservation values. The donor gets a tax deduction for this. The problem is that very often, the value of the conservation easement is grossly overstated for tax purposes, or partnerships are created without any legitimate business purpose other than to game the system and create tax deductions for conservation easements. The IRS says it has found tens of billions of dollars of deductions that were improperly claimed in the last five years.
12. Abusive Micro-Captive Insurance Arrangements
As mentioned earlier, captive insurance arrangements are legitimate planning strategies. A micro-captive simply means a smaller arrangement that complies with Internal Revenue Code Section 831(b). Micro-captives provide additional tax benefits to traditional captive arrangements. Here the IRS is referring to situations where the offending party participates in schemes that aren’t really insurance at all, such as “insuring” implausible risks or duplicating the organization’s commercial coverage. In this case, the so-called “premiums” paid under these arrangements are often excessive and designed to get around the tax law.
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