4 Tax Schemes From The IRS's "Dirty Dozen" List That Can Get The Average Taxpayer…
Each year, the Internal Revenue Service issues a “Dirty Dozen” campaign, in which the agency provides details regarding common tax scams from that tax year. The last of this year’s Dirty Dozen schemes were warned against this week in the most recent IRS publication.
Although these tax scams may be encountered anytime throughout the year, they are most common during tax filing season. The IRS warns taxpayers to be aware of schemes or scams that dramatically reduce tax obligation or eliminate it altogether. If a tax scheme sounds too good to be true, it probably is.
Tax schemes can take many shapes and forms. It’s not uncommon for tax schemes to involve an international bank account or asset arrangement in an attempt to hide funds. In many cases, tax avoidance scams target high-income taxpayers who are looking for ways to reduce their tax obligations, while others target the average taxpayer who may be more gullible to smaller reductions in their tax burden. IRS Commissioner Danny Werfel urges taxpayers to “always look for advice from an independent, trusted tax professional, not a promoter focused on aggressively marketing and pushing questionable transactions.”
Some of the schemes on the Dirty Dozen list are repeated from previous tax years; others are newer scams. Although the Dirty Dozen is not an exhaustive compilation of all tax schemes, is not legally binding, and is not necessarily an indication of the agency’s enforcement priorities, it provides taxpayers and tax professionals with valuable information about common tax scams they may encounter.
On April 3, the IRS released the last of their Dirty Dozen tax schemes list. Tax avoidance strategies on this list include:
A micro-captive is a type of insurance company whose owners opt to be taxed only on the captive’s investment income. Illegitimate micro-captive insurance companies lack the attributes of legitimate insurance, including excessive premiums, failure to meet business needs, and unlikely risks. The IRS continues to prioritize investigation and enforcement against transactions with abusive micro-captive insurance companies and has been highly successful in their past prosecution.
Taxpayers can claim a charitable contribution deduction for the fair market value of a conservation easement that is transferred to a charity, provided that the transfer and the charity satisfy the requirements of associated IRS code. In some cases, taxpayers may be encouraged to conduct a fraudulent conservation easement transaction in order to abuse the tax system and receive an inflated tax deduction. Congress recently amended the IRS code in hopes of reducing abusive conservation easement transactions, while the IRS remains dedicated to promoting compliance and honest transactions.
The IRS will continue to prioritize international tax compliance issues. This includes taxpayers who attempt to hide their assets through the use of digital currencies or offshore accounts. Anyone who files taxes in the United States is taxed on their worldwide income, unless they are able to establish an exemption.
Unfortunately, some tax scammers promote the placing of funds into offshore accounts or conversion to a digital currency, stating that the IRS is unable to reach these accounts. The truth is that the IRS is dedicated to identifying and prosecuting individuals who attempt to conceal their income, and even has a dedicated branch for tracking, identifying, and prosecuting violators internationally or in digital streams. Failing to file or accurately report incomes is likely to result in penalties. Most tax schemes related to digital assets or offshore accounts promise tax savings that are too good to be true and will result in serious consequences.
A significant tax scam on the Dirty Dozen list involves attempts to avoid taxation through contributions to foreign individual retirement arrangements in Malta or other host countries. In most cases, the participants in these transactions do not have any local connection to Malta or another host country. By asserting these transactions as a pension fund, taxpayers misuse treaty provisions and misuse exemption claims, and may face prosecution.
This scam involves American business owners who participate in insurance arrangements with a foreign corporation, usually in Puerto Rico, in which they have a financial interest. The business owner will claim a deduction for premiums through a complicated and fraudulent insurance scheme. Similar to other insurance schemes, these arrangements typically do not carry the attributes of a legitimate insurance company and carry significant penalties.
The criminal division of the Internal Revenue Service (IRS-CI) is dedicated to identifying, tracking, and prosecuting the individuals who promote and participate in tax schemes. It’s crucial that taxpayers are watchful for questionable arrangements on their tax returns because they are ultimately legally responsible for what is submitted to the IRS, even if they utilize the services of a tax professional. The IRS warns taxpayers against any tax scheme or promise that seems too good to be true and urges avoidance of tax preparers with high fees dependent on the amount of the tax return.
In recent years, the IRS has undertaken to develop their investigative and enforcement methods through the use of data analytic tools, enhanced document matching, and the creation of the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPI). These branches coordinate enforcement activities against taxpayers who commit tax fraud and promoters who market or sell abusive tax evasion schemes. Individuals who are participating in these types of activities can be reported to the IRS through the IRS Lead Development Center in the Office of Promoter Investigations.
If you’re facing an audit from the IRS or are concerned that you may have fallen victim to a tax scheme, schedule your consultation with the experienced attorneys at Silver Law, PLC. As Arizona’s trusted tax attorneys, we are ready to protect your rights with aggressive, ethical representation based on our collective decades of experience as attorneys and former IRS employees. Contact our office to learn more about how we can help you through your tax controversy!
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