4 Tax Schemes From The IRS’s “Dirty Dozen” List That Can Get The Average Taxpayer In Serious Trouble

On June 1 of this year, the Internal Revenue Service announced its “Dirty Dozen” list for 2022, which is a list of tax avoidance schemes that taxpayers should avoid filing on their returns. These potentially abusive arrangements are likely to attract IRS attention as the agency hones in on specific tax code violations, with unfortunate consequences for taxpayers, even if they were innocently involved or unaware of what they were filing. Since taxpayers are legally responsible for the information on their tax return, it’s important to work with a reputable tax professional to avoid these tax schemes.

The Dirty Dozen list released by the IRS includes a variety of tax scams, some of which target the average taxpayer while others are more complex and cater to higher-income filers. Many of these tax schemes are advertised online and promise tax savings that are too good to be true. Unfortunately, it’s the taxpayer who includes these schemes on his or her tax return who will end up being legally responsible for the consequences. Taxpayers, tax professionals, and financial institutions should vigilantly watch for email and phone call scams along with online advertisements that could constitute tax fraud.
The IRS indicated that these four transactions, along with the remaining eight on their Dirty Dozen list, are high on their enforcement radar and that the agency will be working diligently to monitor for compliance related to these particular tax threats.

Charitable Remainder Annuity Trust (CRAT) Misuse

In this transaction, property that has appreciated in value is transferred to a CRAT. The CRAT subsequently sells the property but does not report the income by claiming a step-up to fair market value. The CRAT then utilizes the proceeds from the sale to purchase a single premium immediate annuity (SPIA); the beneficiary of the SPIA will report only a small portion of the annuity that is received, misapplying the law to treat the remaining payment as an excluded portion of investment that is free of taxation. The IRS encourages taxpayers to consider the rules under sections 72 and 664.

Maltese Pension Arrangements

U.S. citizens or residents attempt to avoid taxes by making contributions to foreign individual retirement arrangements, which are usually in Malta but potentially based in other foreign countries as well. Since the local Maltese law either allows contributions in forms other than cash or doesn’t limit the amount of contribution resulting from employment, the individual improperly asserts that this foreign account is a pension fund and therefore attempts to avoid U.S. income tax on the contributions.

Foreign Captive Insurance

This refers to situations where U.S. citizens take part in alleged insurance arrangements with Puerto Rican or other foreign corporations in which the owner has a financial interest. The American individual or entity claims deductions on their tax returns as the cost of “insurance coverage.” Typically, this purported insurance will include coverage for implausible risks, non-arm’s-length pricing, and/or a lack of business purpose for forming the agreement.

Monetized Installment Sales

These transactions inappropriately use the installment sale rules under section 453 and occur when a seller effectively receives the proceeds of a property sale through purported loans. Generally, the seller agrees to sell appreciated property for cash and then purports the sale of the same property to an intermediary for an installment note. Then, the intermediary purports to sell the property back to the buyer for the cash purchase price. A variety of steps occur which ultimately enable the seller to receive the sales price with fewer transactional fees in the form of an unsecured loan.

IRS Promises To Scrutinize These Transactions

Taxpayers who have participated in any of these types of transactions should consult an independent, experienced tax attorney before claiming any alleged benefits on their tax returns. If a tax return with these transactions has already been filed, an amended return or other corrective step as recommended by a qualified Arizona tax lawyer should take place. The IRS may challenge the received benefits from these transactions and assert penalties as high as 20-40%, and may even include a civil fraud penalty of up to 75% of the underpaid tax amount.
Although this is not an exhaustive list of all types of financial transactions that the IRS is watching, these four tax schemes are some of the more common situations in the last year. The agency advises that taxpayers be wary of transactions that seem too good to be true. As part of its commitment to hosting a robust tax enforcement presence and voluntary compliance, the IRS has recently developed the Office of Promoter Investigations to coordinate enforcement and find the promoters of these tax avoidance schemes.

Protect Yourself from Tax Schemes with Arizona’s Most Trusted Tax Attorneys

If you are wondering whether you may have participated in a tax scheme, or are unsure what to do next, consult with the attorneys at Silver Law PLC. As former IRS attorneys with decades of legal experience, our lawyers have a solid understanding of the U.S. Tax Code and all relevant legal practices. We have successfully worked with hundreds of taxpayers just like you. Schedule your confidential, no-obligation case review with Silver Law today.