Tim’s Tax News on the Tenth – July 2022

More than twenty years ago, the IRS announced its first list of the Dirty Dozen tax scams directed toward taxpayers. Last month the IRS continued its practice and announced its Dirty Dozen for 2022. The list is as follows:

Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain. In this transaction, appreciated property is transferred to a CRAT. Taxpayers improperly claim the transfer of the appreciated assets to the CRAT in and of itself gives those assets a step-up in basis to fair market value as if they had been sold to the trust. The CRAT then sells the property but does not recognize gain due to the claimed step-up in basis. The CRAT then uses the proceeds to purchase a single premium immediate annuity (SPIA). 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.

Maltese (or Other Foreign) Pension Arrangements Misusing Treaty. In these transactions, U.S. citizens or U.S. residents attempt to avoid U.S. tax by making contributions to certain foreign individual retirement arrangements in Malta (or possibly other foreign countries). In these transactions, the individual typically lacks a local connection, and local law allows contributions in a form other than cash or does not limit the amount of contributions by reference to income earned from employment or self-employment activities. 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.

Puerto Rican and Other Foreign Captive Insurance. In these transactions, U.S owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner has a financial interest. The U.S. based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation. The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered, non-arm’s-length pricing, and lack of business purpose for entering into the arrangement.

Monetized Installment Sales. These transactions involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans. In a typical transaction, the seller 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.

The IRS’ 5th item on its 2022 annual "Dirty Dozen" scams warning list, is a sad reminder that criminals still use the COVID-19 pandemic to steal people's money and identity with bogus emails, social media posts, and unexpected phone calls, among other things. These scams can take a variety of forms, including using unemployment information and fake job offers to steal money and information from people. All of these efforts can lead to sensitive personal information being stolen, with scammers using this to try filing a fraudulent tax return as well as harming victims in other ways. Some of the scams for which people should continue to be on the lookout include:

Economic Impact Payment and tax refund scams: Identity thieves who try to use Economic Impact Payments (EIPs), also known as stimulus payments, are a continuing threat to individuals. Similar to tax refund scams, taxpayers should watch out for these tell-tale signs of a scam:

Any text messages, random incoming phone calls, or emails inquiring about bank account information, 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 and other common issues.

Remember, the IRS will not initiate contact by phone, email, text, or social media asking for Social Security numbers or other personal or financial information related to Economic Impact Payments. Also, be alert to mailbox theft. Routinely check your mail and report suspected mail losses to postal inspectors.

Unemployment fraud leading to inaccurate taxpayer 1099-Gs: Because of the pandemic, many taxpayers lost their jobs and received unemployment compensation from their state. However, scammers also took advantage of the pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims. Payments made on these fraudulent claims went to the identity thieves.

Taxpayers should also be on the lookout for a Form 1099-G reporting unemployment compensation they did not receive. For people in this situation, the IRS urges them to contact their appropriate state agency for a corrected form. If a corrected form cannot be obtained so that a taxpayer can file a timely tax return, taxpayers should complete their return claiming only the unemployment compensation and other income they actually received.

Fake employment offers posted on social media: There have been many reports of fake job postings on social media. The pandemic created many newly unemployed people eager to seek new employment. These fake posts entice their victims to provide their personal financial information. This creates added tax risk for people because this information in turn can be used to file a fraudulent tax return for a fraudulent refund or used in some other criminal endeavor.

Fake charities that steal your money: Bogus charities are always a problem. They tend to be a bigger threat when there is a national crisis like the pandemic. Here are some tips to remember 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, so there is no rush. Donors are encouraged to take time to do the research.

Potential donors should ask the fundraiser for the charity's exact name, web address, and mailing address, so it can be confirmed later. Some dishonest telemarketers use names that sound like large well-known charities to confuse people.

Be careful how a donation is paid. Donors should not work with charities that ask them to pay by giving numbers from a gift card or by wiring money. That is how scammers ask people to pay. It is safest to pay by credit card or check — and only after having, done some research on the charity.

The 6th item on the IRS’ 2022 "Dirty Dozen" scams warning list, is a word of caution to taxpayers with pending tax bills to contact the IRS directly and not go to unscrupulous tax companies that use local advertising and falsely claim they can resolve unpaid taxes for pennies on the dollar. Offer in Compromise (OIC) "mills" make outlandish claims usually in local advertising regarding how they can settle a person’s tax debt for pennies on the dollar. OIC mills are a problem all year long but tend to be more visible right after the filing season is over and taxpayers are trying to resolve their tax issues perhaps after receiving a balance due notice in the mail.

Receipt of suspicious communications in all its various forms are designed to either trick, surprise or scare someone into responding before thinking is No. 7 on the 2022 "Dirty Dozen" scams warning list. The IRS wants to warn everyone to be on the lookout for bogus calls, texts, emails, and posts online to gain trust or steal. Criminals have used these methods for years and they persist because these tricks work enough times to keep the scammers at it. Victims are tricked into providing sensitive personal financial information, money, or other information. This can be used to file false tax returns and tap into financial accounts, among other schemes.

For example, criminals can quickly file a fake tax return using a stolen SSN in the hope that it has not already appeared on another filed return. People frequently do not know they are a victim of identity theft until they are notified by the IRS of a possible issue with their tax return or their return is rejected because the SSN appears on a return already filed.

Close to number 7 above, the IRS’ 8^th item, spear phishing, is on the 2022 "Dirty Dozen" scams warning list and is a serious problem because it can be tailored to attack and steal the computer system credentials of any small business with a client database, such as tax professionals' firms.

Spear phishing is an email scam that attempts to steal a 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. Spear phishing can be tailored to attack any type of business or organization, so everyone needs to be on the lookout and not rush to act when a strange email comes in.

The latest phishing email uses the IRS logo and a variety of subject lines such as "Action Required: Your account has now been put on hold." The IRS has observed similar bogus emails that claim to be from a "tax preparation application provider." One such variation offers an "unusual activity report" and a solution link for the recipient to restore their account.

Rounding out the last four scams the IRS warns taxpayers to watch out for promoters peddling “too-good-to-be-true” schemes. As part of its mission, the IRS is focused on high-income taxpayers who engage in various types of tax violations, ranging from the most basic, failing to file returns up to sophisticated transactions involving abusive syndicated conservation easement deals and abusive domestic micro-captive insurance arrangements. The IRS publishes the Dirty Dozen as part of a broad ranging effort to inform taxpayers. The IRS warns taxpayers should be careful not to get conned into using well-worn abusive arrangements such as the following four schemes that typically target high-net-worth individuals who are looking for ways to avoid paying taxes. Solicitations for investment in these schemes are generally more targeted than solicitations for widespread scams, such as email scams, that can hit anyone.

Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets: The IRS remains focused on stopping tax avoidance by those who hide assets in offshore accounts and in accounts holding cryptocurrency or other digital assets. International tax compliance is a top priority of the IRS. New patterns and trends emerging in complex international tax avoidance schemes and cross-border transactions have heightened concerns regarding the lack of tax compliance by individuals and entities with an international footprint. As international tax and money laundering crimes have increased, the IRS continues to protect the integrity of the U.S. tax system by helping American taxpayers to understand and meet their tax responsibilities and by enforcing the law with integrity and fairness, worldwide.

High-income individuals who do not file tax returns: The IRS continues to focus on people who choose to ignore the law and not file a tax return, especially those individuals earning more than $100,000 a year. Taxpayers who exercise their best efforts to file their tax returns and pay their taxes, or enter into agreements to pay their taxes, deserve to know that the IRS is pursuing others who have failed to satisfy their filing and payment obligations. The good news is most people file on time and pay their fair share of tax.

Abusive Syndicated Conservation Easements: In syndicated conservation easements, promoters take a provision of the tax law allowing for conservation easements and twist it by using inflated appraisals of undeveloped land (or, for a few specialized ones, the facades of historic buildings), and by using partnership arrangements devoid of a legitimate business purpose. These abusive arrangements do nothing more than game the tax system with grossly inflated tax deductions and generate high fees for promoters.

The IRS urges taxpayers to avoid becoming ensnared in these deals sold by unscrupulous promoters. If something sounds too good to be true, then it probably is. People can risk severe monetary penalties for engaging in questionable deals such as abusive syndicated conservation easements.

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.

Recently, the IRS has stepped up enforcement against a variation using potentially abusive offshore captive insurance companies. Abusive micro-captive transactions continue to be a high-priority area of focus. The IRS has conducted thousands of participant examination and promoter investigations, assessed hundreds of millions of dollars in additional taxes and penalties owed, and launched a successful settlement initiative. The IRS has won all micro-captive Tax Court and appellate court cases, decided on their merits, since 2017.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 29 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.

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Lavelle Law, Ltd. is registered with the Illinois Department of Financial and Professional Regulation as an approved continuing education provider for CPE for CPAs and Enrolled Agents. If your organization is seeking CPE courses in the area of Business Law, Innocent Spouse Relief, IRS Collections, Tax Scams (including ID Theft), or other areas in tax law that can be taught at your office, please contact me at thughes@lavellelaw.com.