July 2022 Foodman Website and JD Supra
tax avoidance

The IRS wrapped its 2022 Dirty Dozen scams list urging taxpayers to watch out for and avoid being misled by tax avoidance strategies.  Making the 2022 List are Cryptocurrency, non-filing, abusive syndicated conservation easement and abusive micro-captive deals. Taxpayers ought to be aware that they can not hide income from the IRS: “These tax avoidance strategies are promoted to unsuspecting folks with too-good-to-be-true promises of reducing taxes or avoiding taxes altogether,” said IRS Commissioner Chuck Rettig. “Taxpayers should not kid themselves into believing they can hide income from the IRS.  The agency continues to focus on these deals, and people who engage in them face steep civil penalties or criminal charges.”  The IRS has been steady in its warning to taxpayers that the Agency is focused on high-income taxpayers who engage in various types of tax violations which include:

  • the most basic
  • hiding assets in offshore accounts and in accounts holding cryptocurrency or other digital assets.
  • failing to file returns
  • engaging in sophisticated transactions that involve abusive syndicated conservation easement deals
  • participating in abusive domestic micro-captive insurance arrangements

The IRS has stepped up its enforcements efforts for tax avoidance abusive schemes in recent years

The IRS Office of Chief Counsel announced earlier this year it would hire up to 200 additional attorneys to help the agency combat abusive syndicated conservation easements and micro-captive transactions as well as other abusive schemes. Moreover, new, and evolving data analytic tools and enhanced document matching have assisted the IRS in uncovering taxpayers that are hiding assets via anonymous accounts or simply not filing a return in the hopes of “staying off the grid”.

Four scams that target high-net-worth individuals who are looking for ways to avoid paying taxes

  • Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets: The scam list highlights that the IRS is aware of new patterns and trends emerging in complex international tax avoidance schemes and cross-border transactions that have heightened its concerns regarding the lack of tax compliance by individuals and entities with an international footprint. The IRS has identified individuals that have attempted to evade U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities. These individuals can then access the funds using debit cards, credit cards, wire transfers or other arrangements as well as foreign trusts, employee-leasing schemes, private annuities, and structured transactions.  The purpose of the scheme is to “attempt to conceal” the true owner of an account or insurance plan.

IRS acknowledges that the evolvement of digital technology across the world has created tax administration challenges regarding digital assets due to an incorrect perception that digital asset accounts are undetectable by tax authorities. Most people still believe this and as a result, unethical promoters continue to perpetuate this myth and make assertions that taxpayers can easily conceal their digital asset holdings.

Taxpayers ought to understand that they could be subject to both civil fraud penalties and criminal charges   from a failure to report transactions involving digital assets.

“The IRS is able to identify and track otherwise anonymous transactions of international accounts as well as digital assets during the enforcement of our nation’s tax laws,” Rettig said. “We urge everyone to come into compliance with their filing and reporting responsibilities and avoid compromising themselves in schemes that will ultimately go badly for them.”

  • High-income individuals who don’t file tax returns: The IRS continues to focus on people who choose to ignore the law and not file a tax return, especially those individuals earning more than $100,000 a year. Taxpayers that decide not to file a return even when they have a legal filing requirement, particularly those earning more than $100,000 per year who don’t file, continue to be a top priority for the IRS.   The IRS has been addressing high income non-filers more aggressively.  Non-filer Taxpayers ought to understand that the Failure to File Penalty is initially much higher than the Failure to Pay Penalty. The Failure to File Penalty is generally 5% of the unpaid taxes for each month or part of a month that a tax return is late filed. The penalty generally will not exceed 25% of unpaid taxes. The Failure to Pay Penalty is generally 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty will not exceed 25% of unpaid taxes. If a taxpayer’s ’s failure to file is deemed fraudulent, the penalty generally increases from 5 percent per month to 15 percent for each month or part of a month the return is late, with the maximum penalty generally increasing from 25 percent to 75 percent.
  • Abusive Syndicated Conservation Easements: In this scheme, promoters take a provision of the tax law allowing for conservation easements and twist it by using inflated appraisals of undeveloped land and by using partnership arrangements devoid of a legitimate business purpose. These arrangements generate inflated tax deductions and high fees for promoters. The IRS examines 100 percent of these deals.

“We are devoting a lot of resources to combating abusive conservation easements because it is important for fairness in tax administration,” Commissioner Rettig stated. “It is not fair that wage-earners pay their fair share year after year, but high-net-worth individuals can, under the guise of a real estate investment, avoid millions of dollars in tax through overvalued conservation easement contributions.”

  • Abusive Micro-Captive Insurance Arrangements: In these structures, the promoters, accountants, or wealth planners convince owners of closely held entities to participate in schemes that lack many of the attributes of insurance. Examples are coverages that may “insure” implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s commercial coverages.  As a result, the premiums paid under these structures are excessive and are used to circumvent the tax law. Of note, the IRS has won all micro-captive Tax Court and appellate court cases, decided on their merits, since 2017.

Why can’t Taxpayers understand that if something sounds too good to be true, then it probably is? ©