Each year, the IRS releases a list of its top twelve tax-related scams, dubbed the “Dirty Dozen.” The 2022 edition of this list was recently released, warning taxpayers about the most popular scams circulated over the past year. Given the fact the pandemic continued through 2021, scammers used this opportunity to prey upon the uncertainty of Americans. The IRS breaks its 2022 list out into three categories:
- Potentially abusive arrangements
- Consumer-focused fraud
- High-net-worth scams
Potentially abusive arrangements
On June 1, the IRS released the first four items on its 2022 list.
1. Charitable Remainder Annuity Trusts (CRATs)
In this arrangement, taxpayers transfer appreciated property to a CRAT and claim a step-up in basis to fair market value if the assets had been sold to the CRAT. While the CRAT sells the assets, it doesn’t recognize gain since it depends on the step-up. As a result, the CRAT uses the proceeds from the sale to purchase a single-premium immediate annuity. The beneficiary only includes a small portion of the annuity proceeds in income and treats the rest as a tax-free return on investment.
2. Treaty benefits for pensions
Certain taxpayers use an interpretation of the U.S.-Malta Income Tax Treaty to state they may contribute appreciated property tax-free to certain Maltese pension plans without tax consequence when the plan sells the assets and distributes proceeds to the U.S. taxpayer.
3. Foreign captive insurance
U.S. owners of closely held entities engage in a proposed insurance arrangement with a foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner holds a financial interest. The U.S.-based owner claims deductions for the cost of supposed “insurance coverage” provided by a carrier, reinsuring the “coverage” with the foreign corporation. Common characteristics of foreign captive insurance include implausible risk coverage, non-arm’s-length pricing and lack of business purpose for entering the arrangement.
4. Monetized installment sales
Promoters target individuals looking to defer the recognition of gain upon the sale of appreciated property and create an abusive shelter by selling them monetized installment sales.
Between June 6-9, the IRS added four more items to the list.
5. COVID-related fraud
Economic impact payment (EIP), or stimulus payment, scams are still popular, as their unprecedented nature raised many questions from taxpayers. It is important to know that EIPs will only ever come from the IRS and the IRS will never call, text, email or reach out via social media with information regarding EIPs. Never click suspicious links asking to verify any financial information.
Another pandemic-related scam taxpayers should be vigilant of is unemployment fraud. Since the pandemic caused an overwhelming number of Americans to lose their jobs, scammers stole the personal information of individuals who had not filed claims and had the unemployment money sent to the scammers. Taxpayers should be on alert if they receive a Form 1099-G in the mail to report compensation they did not receive.
6. Offer in compromise mills
An Offer in Compromise (OIC) is an agreement between the IRS and a taxpayer to resolve the taxpayer’s tax debt. Unfortunately, OIC “mills” have grown in popularity, duping taxpayers into settling their debts for pennies on the dollar even if they know the taxpayer will not qualify. In turn, taxpayers are left paying up to thousands of dollars to dissolve a debt that wasn’t approved by the IRS, digging them deeper into debt in the long run.
7. Anonymous communications
It’s no secret that fraudulent emails, texts and social media messages continue to be on the rise every tax season. However, scammers are continuing their attacks long after individuals file their returns, and they’re getting sneakier. For example, common scams involve scammers posing as close contacts of the recipient, which baits the individual into thinking they’re communicating with a family member, friend or business associate and sharing sensitive information. If you receive a suspicious attachment or link, no matter who it is from, do not click on it.
8. Spear phishing
Common spear phishing scams involve the IRS’s logo and use subject lines encouraging urgency, such as “Action Required – Your Account is Frozen.” Other scammers have pretended to be from a tax return preparation website or offered a resolution link for a fake unusual activity report.
The IRS rounded out its 2022 Dirty Dozen list with items 9 through 12 on June 10.
9. Offshore accounts and digital assets
Individuals leveraging this scam evade U.S. tax by concealing income in offshore banks, brokerage accounts or nominee entities. Their funds are accessed via credit and/or debit cards, wire transfers, private annuities or structured transactions which hide the owner of the accounts.
10. High-earner failure to file
The IRS is prioritizing its failure to file efforts on high earners making more than $100,000 per year who do not file tax returns.
11. Syndicated conservation easements
Promoters take a provision of tax law for conservation easements and game the system to generate inflated and unnecessary tax deductions.
12. Microcaptive insurance arrangements
Promoters convince owners of closely held entities to take part in scams lacking many attributes of insurance, such as not providing sufficient coverage or duplicating the taxpayer’s existing coverage.
If you believe you’ve fallen victim to a scam, you should contact the IRS immediately. As always, our tax advisors stand ready to help meet your business and personal tax needs.
Questions about how your business can avoid the “Dirty Dozen” scams?