Every year, the IRS publishes a list of the tax scams that taxpayers should avoid. The list informs taxpayers, tax professionals, and financial institutions about new developments in the tax administration world.
These tax scams can happen at any time of year, but the IRS notices a spike during filing season. This year’s 12-point list includes potentially abusive behaviours, consumer-level frauds, and solicitations for high-net-worth individuals.
1. Use of a Charitable Remainder Annuity Trust (CRAT) to Avoid Taxes
This occurs when an appreciated property is transferred to a CRAT and the owner incorrectly claims the transfer of the appreciated assets as a step-up to fair market value. The CRAT sells the property, but the profit is not recognised due to the purported step-up.
The proceeds are used to purchase a single premium immediate annuity through the CRAT. The beneficiary then reports only a portion of the SPIA annuity. The beneficiary positions the remaining payment as an excluded portion serving as a return on investment on which no tax is due by misapplying the law pertaining to CRATs.
2. Misuse of Treaty Provisions in Maltese (or Other Foreign) Pension Arrangements
This occurs when US citizens or residents attempt to avoid paying US taxes by contributing to specific foreign individual retirement arrangements in Malta and possibly other countries. Frequently, the individual lacks a local connection. Local law, however, allows non-cash contributions and does not limit the number of contributions. The individual then falsely claims the foreign arrangement as a “pension fund” for tax treaty purposes in the United States.
3. Revenue from Instalment Sales
This occurs when a seller improperly uses Section 453 instalment sales rules to disguise sales proceeds as purported loans. The seller enters into an agreement to sell the appreciated property to a buyer for cash. After that, the seller claims to be selling the same property to an intermediary in exchange for an instalment note. The intermediary then pretends to sell the property to the buyer and receives the cash purchase price.
4. Scams Involving Pandemics
Be on the lookout for scammers who continue to use the COVID-19 pandemic to steal identities and funds via fraudulent emails, online posts, and phone calls. These scams include fake job offers and unemployment information, which are used to steal an individual’s sensitive personal information such as Social Security numbers, date of birth, and so on. The scammer will then use this information to file a false tax return.
5. Stay away from Offer in Compromise (OIC) mills
The IRS encourages taxpayers who have outstanding tax bills to contact them directly rather than going through shady tax companies that falsely claim to be able to resolve unpaid taxes for pennies on the dollar. These are known as “OIC mills,” and they provide misleading and inaccurate tax advice, which can cost a taxpayer time and money. The IRS has its own Pre-Qualifier for Offers in Compromise.
6. Unusual Communications
There are numerous methods of communication that criminals use to trick victims into providing personal information and money. Be wary of phone calls, texts, emails, and other online posts that request personal or financial information.
The IRS never asks for personal information via email, text message, or social media, and they never leave pre-recorded voice messages on phones. You can report suspected fraudulent messages from entities impersonating the IRS to [email protected].
7. Attacks Using Spear Phishing
Scammers can attack your personal computer or device, as well as your company’s entire computer network, in spear phishing attacks. Scammers send emails or other messages claiming that the recipient’s account has been locked. They then inform the victims that they must send their login credentials in order to regain access to the account. It is best to disregard these emails and report them to [email protected].
8. Asset concealment in offshore accounts and improper digital asset reporting
The IRS is working hard to keep people from using offshore accounts and incorrectly reporting digital assets (cryptocurrency) to avoid paying required taxes. Funds held in offshore accounts by US citizens are still subject to IRS oversight and regulation. Suspicious cryptocurrency transactions will almost certainly raise red flags with the IRS and possibly other agencies.
9. Individuals with High Income Who Do Not File Tax Returns
The IRS has made pursuing tax evaders who earn more than $100,000 per year a top priority. High-earners who fail to file their tax returns on time may face both a Failure to File Penalty and a Failure to Pay Penalty, both of which carry hefty fines.
10. Syndicated Conservation Easements That Are Abusive
In the world of syndicated conservation easements, some will take advantage of the system by inflating appraisals of undeveloped land and forming partnerships with no legitimate purpose. This practise enables abusers to grossly inflate their deductions and avoid paying what is owed in taxes, which can amount to millions of dollars in some cases.
11. Micro-Captive Insurance Arrangements That Are Abusive
Be cautious of shady insurance arrangements that lack many of the characteristics of legitimate insurance arrangements. Coverage that “insures” implausible risks, fails to meet genuine business needs, or duplicates previous coverage may be included in these arrangements. The “premiums” paid under these arrangements are excessive and a tax avoidance scheme.
If you have any questions, contact an expert tax advisor.
If you have been the victim of one of the tax scams, you should seek the advice of an expert tax advisor who can explain the potential consequences. Taxpayers who have already claimed benefits as a result of one of these scams may be required to take corrective actionIn this situation, an accountant can advise taxpayers on what steps to take, such as filing an amended return.
Contact our team at The Pro Accountants and Tax Consultants LLC if you have any questions about the IRS’s tax scams.
