IRS Cautions Wealthy Vulnerable Taxpayers about 3 Tax Scams

IRS Cautions Wealthy Vulnerable Taxpayers about 3 Tax Scams

IRS Warns Wealthy Taxpayers in New Dirty Dozen List (2024)

Each year, the Internal Revenue Service publishes its Dirty Dozen list. This list identifies 12 of the most common slash egregious violations that the IRS has been honing in on and will continue to focus on in the years to come. In recent years, there has been more of a focus on high-income and wealthy taxpayers and the scams that they sometimes fall for. Oftentimes, the general public believes that wealthy taxpayers are always seeking to hide assets and illegally avoid tax — but that is not always the case. Oftentimes taxpayers fall victim to tax frauds and other tax scams just as non-wealthy taxpayers do, except the scams are different. Oftentimes, wealthy taxpayers fall for tax promotion scams that may involve moving money into syndicated conservation easements or Malta pension plans. The IRS recently published its new Dirty Dozen list for 2024 and there are three important tax scams that wealthy taxpayers need to be aware of – and avoid.

New Dirty Dozen List

IR-2024-104, April 10, 2024

      • “WASHINGTON — As part of the Dirty Dozen campaign, the Internal Revenue Service warned wealthy individuals about three tax traps designed for them by dishonest promoters and shady tax practitioners.
        • For those with high incomes, they can be tempting targets for a variety of schemes and aggressive tax strategies designed to reduce taxes. These can take many different forms, ranging from inflated art donation deductions to aggressive charitable remainder annuity trusts and detailed shelters that maneuver to delay paying gains on property.
        • “High-income taxpayers can be vulnerable to being pulled into these aggressive schemes and scams,” said IRS Commissioner Danny Werfel. “Taxpayers should be extra careful on tax maneuvers that seem too good to be true. Beware of advertisements for seemingly ideal tax structures that distort tax laws and leave victims with civil or criminal tax penalties.”
        • “There’s growing risk for taxpayers pulled into aggressive schemes as the IRS continues to accelerate and expand our compliance work involving high-income individuals,” Werfel added. “The IRS reminds taxpayers that relying on an independent tax or legal professional can help avoid problems with aggressive promoters.”
        • This marks the tenth day of the special Dirty Dozen series. The annual Dirty Dozen list comprises a list of scams and schemes that can put taxpayers and tax professionals at risk. The list is not a legal document nor a formal enforcement priority. The education effort is designed to raise awareness and protect taxpayers and tax pros from common tax scams and schemes.”

Improper art donation deductions

        • “There are ways for taxpayers to properly claim donations of art. But some unscrupulous promoters use direct solicitation to promise values of art that are too good to be true.
          • These promoters encourage taxpayers to buy various types of art, often at a “discounted” price. This price may also include additional services from the promoter, such as storage, shipping and arranging the appraisal and donation of the art. The promotor promises the art is worth significantly more than the purchase price.
          • These schemes are designed to encourage purchasers to donate the art after waiting at least one year and to claim a tax deduction for an inflated fair market value, which is substantially more than they paid for the artwork. Promoters may suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount. Promoters may even arrange for certain charities to take the donations.
          • The IRS has a team of professionally trained Appraisers in art appraisal services who provide assistance and advice to the IRS and taxpayers on valuation questions in connection with personal property and works of art.
          • “Creativity in art is a beautiful thing, but aggressive creativity in art donation deductions can paint a bad picture for people pulled into these schemes,” Werfel said. “This is another example where people should be careful when it comes to aggressive marketing and promotions. There are legitimate ways to claim an art donation, but taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals. Beauty is not always in the eye of the beholder when it comes to tax deductions of art.””

Charitable remainder annuity trust

      • Charitable remainder trusts (CRAT) are irrevocable trusts that let persons donate assets to charity and draw annual income for life or for a specific time period. The IRS examines charitable remainder trusts to ensure they correctly report trust income and distributions to beneficiaries, file required tax documents and follow applicable laws and rules. A CRAT pays a specific dollar amount each year.
        • Unfortunately, these trusts are sometimes misused to eliminate capital gain.
          • Here’s how it works. The appreciated property is transferred to a CRAT. Taxpayers wrongly claim the transfer of the appreciated assets to the CRAT, which 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 then 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 who seek to achieve this inaccurate result do so by misapplying the rules.

Monetized installment sales

      • In these frequently shady deals, promoters look for taxpayers seeking to defer the recognition of gain upon the sale of appreciated property and then organize an abusive shelter through selling them monetized installment sales. These transactions occur when an intermediary purchases appreciated property from a seller in exchange for an installment note, which typically provides for payments of interest only, with principal being paid at the end of the term.
        • In these arrangements, the seller gets the lion’s share of the proceeds but improperly delays the gain recognition on the appreciated property until the final payment on the installment note, often slated for many years later.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.