Compiled annually, the IRS “Dirty Dozen” is a taxpayer education initiative that lists and discusses the most frequently encountered tax scams each year. While taxpayers may encounter these at any time, the more common trends and transactions typically peak during filing season as returns are prepared and filed. The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials. For your benefit, we have summarized the most common tax scams, as listed in the IRS “Dirty Dozen,” released in June 2022.
(1) Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain
In these transactions, taxpayers transfer appreciated property to a Charitable Remainder Annuity Trust. Then, a claim is made that the transfer of the appreciated assets gives those assets a step-up in basis to fair market value as if they had been sold to the trust. The CRAT sells the property but does not recognize gain due to the claimed step-up in basis. The proceeds are then used to purchase a single premium immediate annuity (SPIA). The beneficiary reports, as income, only a small portion of the annuity received from the SPIA and 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 my misapplying the rules under Internal Revenue Code Sections 72 and 664.
(2) Maltese (or Other Foreign) Pension Arrangements Misusing Treaty
U.S. citizens or U.S. residents attempt to avoid U.S. tax by making contributions to certain individual retirement arrangements in foreign nations. By improperly asserting the foreign arrangement is a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty to improperly claim an exemption from U.S. income tax on earnings in, and distributions from, the foreign arrangement.
(3) Puerto Rican and Other Foreign Captive Insurance
U.S. owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. owner has a financial interest. The U.S. entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation.
(4) Monetized Installment Sales
The seller of a property, in the same year of the sale, enters into a contract to sell appreciated property to a buyer for cash and then purports to sell the same property to an intermediary in return for an installment note. The intermediary then purports to sell the property to the buyer and receives the cash purchase price. Through a series of related steps, the seller receives an amount equivalent to the sales price, less various transactional fees, in the form of a purported loan that is nonrecourse and unsecured.
(5) Pandemic-Related Scams
These types of scams include:
(a) Economic Impact Payment and Tax Refund Scams
Identity thieves continue to try and use Economic Impact Payments (EIPs) as a way to scam taxpayers. The IRS will not initiate contact by phone, email, text or social media asking for personal or financial information related to Economic Impact Payments. The IRS has issued all EIPs, and most eligible recipients have already received their stimulus payments. The IRS warns taxpayers to watch out for any text messages, random incoming phone calls or emails inquiring about bank account information. Communications requesting recipients to click a link or verify data should be considered suspicious and deleted without opening. This includes not just stimulus payments, but tax refunds as well.
(b) Unemployment Fraud Leading to Inaccurate Taxpayer 1099-Gs
Because of the pandemic, many taxpayers lost their jobs and received unemployment benefits from their state. Scammers also took advantage of the pandemic by filing fraudulent claims for unemployment benefits using stolen personal information. Taxpayers should also be on the lookout for a Form 1099-G reporting unemployment compensation they didn’t receive. If you received an erroneous Form 1099-G, the IRS urges you to contact the appropriate state agency for a corrected form. Taxpayers should only complete their tax returns by claiming unemployment compensation and other income that they actually received.
(c) Fake Employment Offers Posted on Social Media
The pandemic created many newly unemployed people eager to seek new employment. Fake social media posts entice their victims to provide personal financial information in applying for employment.
(d) Fake Charities That Steal Your Money
The IRS warns that bogus charities are always a problem when there is a national crisis such as a pandemic. In order to receive a deduction, the taxpayer must donate to a qualified charity. The IRS provides the following tips about fake charity scams:
- Individuals should never let any caller pressure them. A legitimate charity will be happy to get a donation at any time, and will not rush you to make a donation.
- Potential donors should ask the fundraiser for the charity’s exact name, web address and mailing address, so it can be confirmed later. Some scammers use names that sound like large, well-known charities to confuse people.
- Be careful how a donation is paid. Donors should not make payments to charities by giving numbers from a gift card or by wiring money. It’s safest to pay by credit card or check — and only after having done some research on the charity.
(6) Offer in Compromise (OIC) Mills
These OIC “mills” make outlandish claims, usually using local advertising, claiming to settle a taxpayer’s tax debt for pennies on the dollar. Often, a taxpayer will pay these OIC mills a fee to get the same deal that the taxpayer would have gotten had he or she worked directly with the IRS. These scams often appear after filing season ends and when taxpayers are trying to resolve their tax issues after receiving a balance due notice in the mail.
(7) Communications Scams
Suspicious communications in all forms designed to either trick, surprise or scare someone into responding before thinking have found their place on the “Dirty Dozen” list many times. Victims are tricked into providing sensitive personal financial information, money or other information via bogus phone calls, texts, and emails. This can be used to file false tax returns and tap into financial accounts, among other schemes. The IRS (and its authorized private collection agencies) will never call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer.
(8) Spear Phishing
Spear phishing is an email scam that attempts to steal a taxpayer or tax professional’s software preparation credentials. These thieves try to steal client data and tax preparers’ identities in an attempt to file fraudulent tax returns for refunds. Emails claiming “Your account has been put on hold” are scams. Scammers may also pretend to be from a tax preparation website to send a fake link and obtain information.
(9) Concealing Assets Offshore and Improper Reporting of Digital Assets
U.S. persons are taxed on worldwide income. The mere fact that money is placed in an offshore account does not put it out of reach of the U.S. tax system. U.S. 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.
In addition, digital assets are being adopted by mainstream financial organizations along with many other parts of the economy. The proliferation of digital assets across the world has created tax administration challenges regarding digital assets, in part because there is an incorrect belief that digital asset accounts are undetectable by tax authorities. Scammers continue to perpetuate this myth and make assertions that taxpayers can easily conceal their digital asset holdings.
(10) High-Income Individuals Who Don’t File Tax Returns
High-Income individuals making more than $100,000 a year who fail to file tax returns are among the highest priority targets of IRS investigations. The Failure to File Penalty is initially much higher than the Failure to Pay Penalty. The IRS reminds those taxpayers who may be wrongly persuaded to not file a tax return that it is more advantageous to file an accurate return on time and set up a payment plan if needed than to not file.
(11) Abusive Syndicated Conservation Easements
In syndicated conservation easements, promoters take a provision of the tax law allowing for conservation easements and twist it to game the tax system with grossly inflated tax deductions and to generate high fees for promoters.
(12) Abusive Micro-Captive Insurance Arrangements
In abusive “micro-captive” structures, promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of 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.
For more information or assistance regarding the 2022 “Dirty Dozen” tax scams, please reach out to request a consultation, call us at 216-696-1422, or visit Kyle’s bio for his contact information to reach out to him directly.
