Dirty Dozen Tax Scams From the IRS to Avoid in 2022

Every year, the IRS publishes a list of the “Dirty Dozen” tax frauds that should be avoided by taxpayers. The list raises awareness of recent advancements in the field of tax administration among taxpayers, tax experts, and financial institutions.

Although these tax frauds can happen at any time of the year, the IRS observes a spike during the filing season. Potentially abusive actions, consumer-level frauds, and high-net-worth solicitations are all on this year’s 12-point list.

Using a CRAT (Charitable Remainder Annuity Trust) To Get Rid of Tax Gains

This occurs when an asset that has been appreciated is transferred to a CRAT. And the owner falsely asserts that the asset has been transferred, acting as a step-up to the fair market value. The property is sold by the CRAT. But due to the alleged step-up, the gain is not recognized.

The proceeds are used by the CRAT to buy a single premium instant annuity (SPIA). The beneficiary then only reports a portion of the SPIA annuity. The beneficiary positions the remaining payment to be an exempt component acting as a return on investment for which no tax is due by incorrectly interpreting the law relating to CRATs.

Abuse of Treaty by Maltese Pension Arrangements

This occurs when American citizens or residents attempt to avoid paying US taxes by funding specific overseas IRAs in Malta and possibly other nations. The person frequently lacks a local connection. Local law does not place a cap on the number of contributions or allow non-cash contributions. The person then falsely claims that the overseas arrangement qualifies as a “pension fund” for the U.S. tax treaty.

Foreign Captive Insurance for Puerto Rico

This is the time when American owners of closely held companies create insurance contracts with foreign firms from Puerto Rico. Or other countries that have cell arrangements or segregated asset plans and are profitable for the American owner.

The owner deducts the price of dubious “insurance coverage” that was offered by a broker. The middleman then has the foreign corporation reinsure the “coverage.” Unrealistic risks covered, non-arm’s-length pricing and a lack of a valid business reason are all warning indications of these dubious insurance contracts.

Sales of Monetized Installments

This is when a seller attempting to pass off sales revenues as pretended loans inappropriately use the installment sales procedures under Section 453 of the Internal Revenue Code. A contract is signed by the seller promising to sell the appreciated property to the buyer for cash. The vendor then claims that they will give the same property to a middleman in exchange for an installment note. The middleman then represents himself as the seller and receives the buyer’s cash purchase money.

Scams Connected to Pandemics

Be on the lookout for con artists that are still using the COVID-19 epidemic to steal identities. As well as money via bogus emails, internet posts, and phone calls. Scammers utilize phony job offers and unemployment information to obtain someone’s sensitive personal information. Such as Social Security numbers, dates of birth, etc. The con artist will use this data to attempt to file a false tax return.

Keep Away From OIC Mills (Offer in Compromise)

The IRS advises taxpayers with unpaid tax bills to get in touch with them directly rather than using shady tax firms that fraudulently advertise that they can settle unpaid taxes for pennies on the dollar.

These are said to as “OIC mills” and provide tax advice that is erroneous and deceptive, which can cost a taxpayer time and money. In the Compromise Pre-Qualifier tool, the IRS has included its Offer.

Untrustworthy Communications

The variety of communication channels that thieves employ to trick victims into parting with cash and personal information is endless. Any phone calls, messages, emails, or other online posts asking for your personal or financial information should be taken with a grain of salt.

The IRS does not send pre-recorded audio messages to phones or ask for personal information by email, text message, or social media.

Attacks Using Spear Phishing

Attacks using spear phishing are worrying since a con artist could target your computer or device. Or potentially the entire computer network of your business. The senders of the fraudulent emails or other messages claim that the recipient’s account has been locked. Then they inform the victims that they must send their login information to restore access to the account. Ignoring these emails and reporting them to phishing@irs.gov is best practice.

Failing to Properly Report Digital Assets and Hiding Assets in Offshore Accounts

The IRS is working to stop people from misreporting digital assets (such as cryptocurrency) and using offshore accounts to evade paying taxes. Americans’ money held in offshore accounts is nevertheless governed and monitored by the IRS. Unscrupulous cryptocurrency transactions will probably also set off some alarms with the IRS and possibly other organizations.

Wealthy People Who Don’t File Tax Returns

The IRS has made pursuing tax evaders who make more than $100,000 a year a key goal. High earners who submit incomplete tax returns on time may be subject to a Failure to File Penalty as well as a Failure to Pay Penalty, both of which carry significant fines.

Reckless Micro-Captive Insurance Contracts

Be wary of dubious insurance plans that lack numerous characteristics of reputable insurance plans. These agreements may contain insurance that “insures” improbable risks, falls short of actual company requirements, or duplicates existing coverage. Under these agreements, extra “premiums” are paid to evade Dirty Dozen taxes.

If You Have Any Questions, Speak to a Seasoned Tax Advisor

It is advisable to seek advice from a qualified tax advisor who can outline the potential repercussions if you have come across any of the Dirty Dozen tax scams. If a taxpayer has already received advantages as a result of one of these frauds, they may need to take corrective action.

Please get in touch with our team at Your Part Time Accountant if you have any inquiries about the IRS’s Dirty Dozen tax frauds.