IRS Completes 2022 ‘Dirty Dozen’ Tax Avoidance and Fraud List

0

The IRS has released its 2022 “Dirty Dozen” tax evasion and fraud list, comprised of heavily promoted transactions likely to attract the attention of the IRS, consumer-focused frauds, and activities targeting tax payers. wealthy people.

“Dirty Dozen” activity tends to be more prevalent during drop off season.

The IRS has compiled the annual list for more than 20 years to alert taxpayers and practitioners to its concerns. The list is not a legal document or a catalog of enforcement priorities; rather, it aims to educate audiences who may not be aware of developments in tax administration.

The IRS identifies problematic transactions through taxpayer reviews, promoter investigations, whistleblower claims, data analysis, document matching, and review of marketing materials.

Heavily promoted and potentially abusive

On June 1, the IRS released items 1 through 4 of its 2022 list (IR-2022-113) with a focus on transactions involving charitable residual annuity trusts (CRATs), individual pension plans foreigners, foreign captive insurance and monetized installment sales.

CRAT. Taxpayers transfer appreciated assets to a CRAT and claim an increase in basis to fair market value as if the assets had been sold to the CRAT. The CRAT sells the assets – but does not recognize the gain because it relies on the step-up – then uses the sale proceeds to purchase an immediate single-premium annuity.

The beneficiary includes in income only a small portion of the annuity proceeds and treats the remainder as a non-taxable investment return (see IRC Sections 72 and 664).

Treaty Benefits for Pensions. US citizens and residents contribute to individual foreign pension schemes in Malta (or other foreign countries). The individual generally does not have a local connection and local law allows contributions of non-cash assets or does not limit the amount of contributions based on income from employment or self-employment.

By treating the foreign retirement arrangement as a pension fund under a tax treaty, the US taxpayer claims an exemption from US tax on income and distributions from the arrangement.

Foreign captive insurance. US owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or foreign company that has cell agreements or separate asset plans in which the US owner has a financial interest.

The U.S. person or entity claims deductions for the cost of insurance coverage provided by a front insurer, who reinsures the coverage with the company.

Agreements typically include implausible risks being covered, non-arm’s length pricing, or a lack of business purpose.

Monetized installment sales. These transactions involve the use of the Section 453 installment sale rules by a real estate seller who actually receives the sale proceeds in the form of loans within one year of the sale.

The seller enters into a contract to sell an appraised property to a cash buyer and then resells the same property to an intermediary in exchange for an installment payment. The intermediary then sells the property to the buyer and receives the purchase price in cash.

Through a series of related steps, the seller receives an amount equal to the selling price less transaction fees in the form of an unsecured, non-recourse loan.

Consumer-driven fraud

Between June 6 and June 9, the IRS released “Dirty Dozen” articles 5 through 8 regarding common tax scams that target average taxpayers. These consumer-oriented activities prey on individuals or organizations to steal financial information and money. These include COVID Fraud (IR-2022-117), Offer in Compromise Factories (IR-2022-119), Anonymous Solicitations (IR-2022-121) and Spear Phishing (IR-2022-122).

COVID Fraud. These activities involve stolen economic impact payments, fraudulent unemployment benefits, fake job offers, and charities.

As with tax refund fraud, identity thieves attempt to steal stimulus payments. They use text messages, random phone calls, and emails to request bank account information or advise recipients to click a link or verify data.

Systemic job losses during the pandemic have led to fraudulent claims for unemployment benefits using information stolen from people who did not file a claim.

Unemployment benefits were paid to identity thieves and generated fake 1099-G forms. In addition, unemployed workers receive bogus job offers that trick them into providing personal information that can be used to file fraudulent tax returns for fraudulent reimbursements.

Fake charities are bigger threats during a national crisis.

Offer in compromise factories. These factories claim in local advertising that they can settle a tax debt for pennies on the dollar. Taxpayers pay fees at the mill and receive the same compromise they could have gotten by working directly with the IRS. Factories charge excessive fees and mislead people who have no chance of meeting compromise requirements.

Anonymous communications. Suspicious text messages, emails, or phone calls are designed to trick, surprise, or scare individuals into responding. Victims provide personal information and money.

Phishing. Phishing emails use the IRS logo and subject lines such as “Action Required: Your account has now been suspended.” Similar fake emails claim to be from a tax preparation app. One variation offers an unusual activity report and solution link for recipients to restore their accounts.

High Net Worth Activities

On June 10, the IRS released List Items 9 through 12 (IR-2022-125), highlighting activities that target high net worth individuals for solicitation. These elements include digital asset transactions, default of deposit, syndicated conservation easements, and microcaptive insurance transactions.

Offshore accounts and digital assets. Individuals evade US tax by hiding income in offshore banks, brokerage accounts, or agent entities. Funds can be accessed using debit and credit cards; wire transfers; or other arrangements, including foreign trusts, employee leasing plans, private annuities, and structured transactions that disguise ownership of accounts or insurance policies.

Failure to declare high income. The IRS continues to focus on people who don’t file taxes, prioritizing those earning more than $100,000 a year. The agency pointed out that it is “better to file an accurate return on time and have a payment plan in place” than not to file because the penalty for failure to report is initially higher than the penalty for failure. of payment (see code section 6651) .

Syndicated conservation easements. Developers sell ownership rights to land to investors through partnerships, then grant conservation easements over the land to qualified charities or government organizations (see Code Section 170). By using inflated valuations of real estate assets such as undeveloped land or facades of historic buildings, the arrangements inflate tax deductions and generate costs for developers.

Microcaptive insurance devices. Like foreign captive insurance, microcaptive insurance structures involve owners of closed entities conducting businesses that lack sufficient insurance attributes. For example, the coverage may insure implausible risks, may not match the true needs of the business, or may duplicate the taxpayer’s business coverage. Premiums are often excessive.

Share.

About Author

Comments are closed.