IRS warns taxpayers about ‘Dirty Dozen’ tax scams for 2022

WASHINGTON- The Internal Revenue Service today launched its “Dirty Dozen” list for 2022, which includes potentially abusive arrangements that taxpayers should avoid.

The potentially abusive arrangements in this series focus on four transactions that are being falsely promoted and will likely attract additional agency compliance efforts in the future. These four abusive transactions relate to charitable residual annuity trusts, Maltese individual pension schemes, foreign captive insurance and monetized installment sales.

“Taxpayers should stop and think twice about including these questionable arrangements on their tax returns,” IRS Commissioner Chuck Rettig said. “Taxpayers are legally responsible for what is on their return, not a promoter making promises and charging high fees. Taxpayers can help end these arrangements by relying on reputable tax professionals they know they can trust.

The four potentially abusive transactions on the list are the first four entries in this year’s Dirty Dozen series. In the coming days, the IRS will focus on eight additional scams, some focused on the average taxpayer and others on more complex arrangements that promoters market to higher income earners.

“A key job for the IRS is to identify emerging compliance threats and educate the public so taxpayers aren’t victimized and tax professionals can provide their clients with the best advice possible,” Rettig said. .

“The IRS considers the four transactions listed here to be potentially abusive, and they are doing very well on our enforcement radar screen.”

The IRS is reminding taxpayers to be careful and avoid advertised schemes, many of which are now being promoted online, that promise too-good-to-be-true tax savings and will likely entice taxpayers into legal compromise.

Taxpayers, tax professionals and financial institutions should be particularly vigilant and beware of all kinds of scams, from simple emails and calls to very dubious but attractive online advertisements.

The top four on the “Dirty Dozen” list are further described as follows:

Use of Charitable Remainder Annuity Trust (CRAT) to eliminate taxable gains. In this transaction, the appraised property is transferred to a CRAT. Taxpayers erroneously claim that the transfer of appreciated assets to the CRAT itself gives those assets an increase in fair market value basis as if they had been sold to the trust. The CRAT then sells the property but does not recognize the gain due to the increase in the claimed base. The CRAT then uses the proceeds to purchase a Single Premium Immediate Annuity (SPIA). The beneficiary declares, as income, only a small part of the annuity received from the SPIA. By misapplication of the law relating to CRATs, the beneficiary treats the balance of payment as an excluded part representing a return on investment for which no tax is due. Taxpayers seek to achieve this inaccurate result by misapplying the rules in sections 72 and 664.

Maltese (or foreign) pension schemes abusing the Treaty. In these transactions, US citizens or US residents attempt to avoid US tax by making contributions to certain foreign individual pension plans in Malta (or possibly other foreign countries). In these transactions, the individual generally does not have a local connection and local law allows non-cash contributions or does not limit the number of contributions based on income from employment or business. independent activities. By falsely asserting that the foreign arrangement is a “pension fund” for US tax treaty purposes, the US taxpayer is misinterpreting the relevant treaty to falsely claim an exemption from US tax on income and distributions from the foreign assembly.

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 company with separate cell agreements or asset plans in which the U.S. owner has an interest. financial. The U.S.-based person or entity claims deductions for the cost of “insurance coverage” provided by a front insurer, who reinsures the “coverage” with the foreign company. Features of purported insurance arrangements will typically include one or more of the following: implausible risks covered, arm’s length pricing, and lack of a business purpose for entering into the arrangement.

Monetized installment sales. These transactions involve the improper use of the installment sale rules under Section 453 by a seller who, within one year of a property sale, actually receives the sale proceeds through purported loans. In a typical transaction, the seller enters into a contract to sell an appraised good to a buyer for cash, and then purports to sell the same good to an intermediary in exchange for an installment payment. The intermediary then purports to sell 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 various transaction fees, in the form of a so-called non-recourse and unsecured loan.

Taxpayers who have engaged in any of these transactions or who are considering engaging in one should carefully consider the underlying legal requirements and consult independent and competent advisers before claiming any alleged tax benefits. Taxpayers who have already claimed the alleged tax benefits of any of these four transactions on a tax return should consider taking corrective action, such as filing an amended return and seeking independent advice. Where appropriate, the IRS will challenge the purported tax benefits of transactions on this list, and the IRS may impose accuracy penalties ranging from 20% to 40%, or a civil fraud penalty of 75% of any tax underpayment.

Although this list is not an exclusive list of transactions that the IRS reviews, it does represent some of the most common trends and transactions that may peak during filing season as returns are prepared and filed. Taxpayers and practitioners should always be wary of entering into transactions that seem “too good to be true”.

The IRS remains committed to having a strong, visible, and robust presence in the tax enforcement arena to support voluntary compliance. To combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Sponsor Investigations (OPI) to coordinate enforcement activities across the service and focus on participants and promoters of abusive tax avoidance transactions. The IRS has a variety of means to find potentially abusive transactions, including reviews, promoter investigations, whistleblower claims, data analysis, and review of marketing materials.

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