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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

IRS Dirty Dozen – 2022 Edition – The Finale

In our final article on the recently released IRS "Dirty Dozen" tax scams, we'll take a broad look at the last five on the list.

Not to spend much time on number eight, but just so you know, it's not just taxpayers who fall prey to subterfuge attempting to steal data, but so can tax professionals. After all, the client information to which we are privy would be a treasure trove for the unscrupulous. 

Suffice it to say, it is incumbent upon us to do everything in our power to protect our clients' information. And if you use a professional preparer, you may want to inquire about their data security policies.

With numbers nine through twelve, the IRS wrapped up its annual "Dirty Dozen" list with four "bogus tax-avoidance strategies" the Service advised taxpayers and their advisers to avoid. As with other items contained within the 2022 listing, the scams in this final batch may be familiar, since they have been highlighted in previous Dirty Dozens and at other times by the IRS.

Nine through twelve are: concealing assets in offshore accounts and improper reporting of digital assets, non-filing of income tax returns by high-income individuals, abusive syndicated conservation easements, and abusive microcaptive insurance arrangements. 

Some of these ploys, like those described in my first article two weeks ago, are commonly pushed by promoters, and the four identified here typically turn up in solicitations to high-income individuals.

Hidden offshore accounts and digital assets

The IRS reminds us that as US taxpayers, we are taxed on our worldwide income. Despite having new laws and better tools in recent decades for detecting unreported foreign income, the IRS recognizes that many individuals employ new and sophisticated tactics for concealing it, such as foreign trusts, employee-leasing arrangements, private annuities, and transactions and nominee entities structured to conceal accounts' or insurance plans' true owners. Consequently, international tax compliance remains a top enforcement priority for the IRS.

Cryptoassets have also proliferated throughout the world's economies and, because their true ownership is often hard to determine, they likewise pose a challenge to tax enforcement. Nonetheless, the IRS says it has means to identify owners of digital assets and track their transactions, contrary to a common but incorrect perception that such transactions are undetectable by tax authorities.

High-income non-filers

The IRS said it focuses as a "top priority" on "people who choose to the ignore the law and not file a tax return, especially those individuals earning more than $100,000 a year." It also reminded taxpayers of failure-to-pay and failure-to-file penalties, the latter of which can be enhanced if the failure is deemed fraudulent. These penalties can be quite onerous.

Abusive syndicated conservation easements

While qualified conservation contributions as defined by the Internal Revenue Code can yield legitimate charitable deductions, including properly established easements and other qualified real property interests, the IRS maintains an ongoing campaign to identify and deny improper tax benefits claimed from arrangements that fail the tests of law and regulation. 

Generally, these abusive arrangements are syndicated, using partnership arrangements lacking a legitimate business purpose. Often, their values are artificially inflated.

The IRS said in the last five years it has examined "many hundreds" of syndicated conservation easement arrangements involving tens of billions of dollars in improper deductions claimed and has litigated hundreds of them.

Abusive microcaptive insurance arrangements

In my first article on the Dirty Dozen, I noted that the IRS highlighted foreign captive insurance abusive arrangements, which it said sometimes involve a Puerto Rico-based closely held corporation. In the twelfth and final item on the list, the Service discussed abusive microcaptive insurance structures more generally, which are also often promoted schemes.

These arrangements generally fail the tests of insurance in its commonly accepted sense and may feature bloated premiums and cover risks that are implausible or lack a business purpose. "Microcaptive" refers to the purported insurer's claim to be a small insurance company under a specific section of the Code, which allows it to pay tax only on investment taxable income.

Like syndicated conservation easements, microcaptive arrangements have been frequently litigated, the IRS said, and the Service's microcaptive legal settlement initiative, in operation since 2020, has brought about numerous out-of-court settlements as well. In fact, very recently, the IRS won a big case in the Tenth Circuit (its first appellate court win), that affirmed a Tax Court decision regarding a microcaptive insurance transaction the IRS says was a sham.

So there you have it, the IRS's 2022 Dirty Dozen presented here over the last three weeks. Not exactly the next great American novel as far as reading goes, but certainly information that could help you, or someone close to you, keep from being taken!

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