The Internal Revenue Service recently wrapped up its 2024 “Dirty Dozen” campaign by warning taxpayers about promoters selling bogus tax strategies and fraudulent offshore schemes designed to reduce or avoid taxes. In its April 11 announcement, the IRS reminded taxpayers to “[r]ely on a reputable tax professional they know and trust” before engaging in tax schemes to avoid potential criminal tax fraud exposure.
“Bogus Tax Avoidance Strategies”
Syndicated conservation easements: Conservation easements are agreements between landowners, who give up rights to develop property, and nonprofit land trusts or government agencies who monitor the land’s use for the public benefit. A taxpayer may generally deduct as a charitable contribution the fair market value of a conservation easement transferred to a charity. The IRS, however, warns against promoters who, for large fees, have syndicated conservation easement transactions that, it alleges, improperly allow an investor in a syndicate partnership to claim charitable contribution deductions that far exceed the investor’s investment. The IRS asserts that these transactions are an “attempt to game the tax system with grossly inflated tax deductions.” In 2023, Congress amended the Internal Revenue Code to provide that syndicated easements appraised at more than 2.5 times the land’s purchase price will not generate charitable deductions, but the IRS will still continue to “keep an eye on transactions that are ‘too good to be true.’”
Micro-captive insurance arrangements: A micro-captive is an insurance company whose owners elect to be taxed on the captive’s investment income only. The IRS describes abusive micro-captives as “schemes that lack many of the attributes of legitimate insurance,” by, for example, insuring implausible risks or unnecessarily duplicating a taxpayer’s commercial coverage. The “premiums” paid are often excessive and not the product of arms-length pricing. “Abusive micro-captive transactions continue to be a high-priority enforcement area for the IRS,” the agency said in its April 11 announcement.
“Schemes involving international elements”
The IRS reports that “[u]nscrupulous promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures” that should be reported to the IRS, claiming falsely that the U.S. person will remain anonymous when, in fact, the “IRS can identify and track anonymous transactions of foreign financial accounts.” The IRS also highlighted two specific international tax avoidance strategies it has been focusing on:
Malta pension plans: Under the plain reading of the U.S.-Malta Income Tax Treaty, U.S. taxpayers can establish tax-favorable pension plans in the island jurisdiction. Promoters of Malta Pension Plans have used the Treaty to structure pensions for wealthy U.S. taxpayers that allow for significant tax savings. While the language of the Treaty and Maltese law (upon which certain treaty benefits hinge) seems to allow for this tax-saving result, the IRS and Treasury have taken the approach in the past year that this is a misuse of the pension funds. In warning taxpayers against investing in Malta Pension Plans, the IRS said: “These [plans] 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: Digital assets, like cryptocurrency, are treated as property for federal tax purposes, and transactions in digital assets must generally be reported on a tax return. The IRS warns that “[u]nscrupulous promoters often recommend digital assets as being untraceable and undiscoverable by the IRS,” when, in fact, “the IRS can identify and track anonymous transactions of digital assets around the globe.”
More information about the IRS’s Dirty Dozen can be found here: https://www.irs.gov/newsroom/dirty-dozen
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