On 4/11/24, the IRS wrapped up its 2024 Dirty Dozen List with a “warning to taxpayers regarding promoters selling bogus tax strategies and fraudulent offshore schemes designed to reduce or avoid taxes altogether”. Tax strategies and schemes to avoid taxes remain a high priority for the IRS. “Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” said IRS Commissioner Danny Werfel. “Promoters continue to peddle elaborate schemes to reduce taxes and make a handsome profit. Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.” The IRS warning regarding tax strategies and schemes to avoid taxes reminds taxpayers that they ought to:
- Think twice before including questionable arrangements like this on their tax returns, as they are responsible for what’s on it once signed.
- Rely on a reputable tax professional they know and trust.
Dirty Dozen warning highlights FATCA as it continues to be a key part in combating tax evasion by U.S. persons holding accounts and other financial assets offshore
FATCA, a law since 2010, has the objective of combating international income tax reporting non-compliance by US citizens and U.S. taxpaying residents. It requires Foreign Financial Institutions (FFIs) to annually report the reportable balances and income in the accounts held by their US customers to the IRS. It requires US Taxpayers to report reportable foreign financial assets and income to the IRS on an annual basis. FATCA imposes penalties on FFIs and US Taxpayers that do not comply with its disclosure requirements. It imposes an automatic 30% withholding tax on U.S.-source payments such as interest and dividends. It imposes a $10,000 penalty on US Taxpayers who fail to report their reportable Foreign Financial Assets. The FATCA disclosure of information by FFIs to the US Government (IRS) has generated revenue to help offset the US Tax Gap resulting from offshore tax non-compliance.
FATCA has become a source of data analytics to the IRS as the IRS continues to cross-reference Foreign Financial Accounts and Assets. It electronically matches (cross-checks) information that is sourced from FATCA reports submitted by Foreign Financial Institutions (on Form 8966 – FATCA Report) and by Individual US Taxpayers that have reporting obligations via Form 8938 (Statement of Specified Foreign Financial Assets) to identify US Taxpayers that are not making required disclosures to IRS through not filing or underreporting as well as FFIs that are not reporting their reportable US account holders.
The warning states that “promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures, saying they are out of reach of the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts.”
Bogus tax avoidance strategies and schemes with international elements including digital assets
- Syndicated conservation easements: a conservation easement is a restriction on the use of real property. Taxpayers could claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets Internal Revenue Code section 170 requirements. In the abusive arrangements, the promoter is syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that exceed the amount the investor invested generating high fees for the promoter and attempting an inflated tax deduction.
- Micro-captive insurance arrangements: also called a small captive, a micro-captive is an insurance company whose owners elect to be taxed on the captive’s investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages. In addition, the “premiums” paid under these arrangements are often excessive, reflecting non-arm’s length pricing.
- Misusing a tax treaty with Maltese individual retirement arrangements: this scheme involves U.S. citizens or residents attempting to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta or another country. These countries allow for contributions in a form other than cash and do not limit the amount of contributions by reference to employment or self-employment activities. By improperly asserting this as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer improperly claims an exemption from U.S. income tax on gains and earnings in, and distributions from, the foreign individual retirement arrangement.
- Digital Assets: promoters often recommend digital assets as being untraceable and undiscoverable by the IRS. The IRS can identify and track anonymous transactions of digital assets around the globe.
IRS Eye on Compliance means that the IRS will challenge the purported tax benefits from transactions and questionable arrangements and impose penalties where needed
The IRS continues to seek out promoters and participants in tax strategies and schemes that aim to avoid taxes. The IRS is vigilant and continues to improve investigation and enforcement by utilizing new and evolving data analytic tools and enhanced document matching.
Are you a victim of tax strategies and schemes that promised tax avoidance?
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