IRS “Dirty Dozen” Part 4: Scams Targeting High-Net-Worth Individuals to Avoid in 2022
We broke down the previously released “Dirty Dozen” scams addressed by the Internal Revenue Service (IRS) to prevent taxpayers from falling susceptible to potentially abusive arrangements here, here, and here. In this article, we share perspective on the last of the “Dirty Dozen” scams targeting high-net-worth individuals who are more likely to unknowingly commit a tax violation or try to hide income from the IRS to avoid paying taxes.
Specific scams that mask as abusive or fraudulent tax avoidance strategies to be aware of include concealing assets in offshore accounts and improper reporting of digital assets, manipulation of high-income taxpayers to file their tax returns, abusive syndicated conservation easements, and abusive micro-captive insurance arrangements. Read more to round out the annual list for the 2022 filing season.
Tips for taxpayers on emerging scams
To avoid compromising yourself with these “too good to be true” schemes, taxpayers should stay wary, as these scams adopt a wide range of communication methods, including:
- Phone calls
- Social media posts
- Targeted online advertisements
You must also consider each source before putting any of these arrangements on your tax returns — because ultimately, you are the one responsible for what is on the return, not the promoter who reached out to you and made a promise they failed to uphold. To mitigate risk, an anxious taxpayer should turn to trustworthy tax professionals to assist with their returns.
Read on to learn about these Dirty Dozen scams targeted primarily to high-net-worth individuals who may be trying to knowingly — or unknowingly — avoid filing.
Scam #9: Concealing Assets in Offshore Accounts and the Improper Reporting of Digital Assets
We hear Switzerland is beautiful this time of year … and so do some high-net-worth individuals looking to conceal their assets in offshore accounts (and yes, that does include cryptocurrency and other digital assets). As more taxpayers look to complex international tax avoidance schemes, the IRS is more determined than ever to “protect the integrity of the U.S. tax system” by enforcing tax responsibilities.
Whether it entails offshore banks, brokerage accounts, nominee entities, employee leasing schemes, foreign trusts, structured transactions, or private annuities, all are designed to hide the true owner of an account — which is illegal, considering U.S. taxpayers are taxed on all the income they make, not just what they keep in the country. But scammers know you may not want to give up some of your hard-earned assets to Uncle Sam. So, what do they do? They sell you a convincing story: you can easily evade the government and hide your assets through digital asset holdings; they claim these are “undetectable by tax authorities.” The catch? They are definitely detectable. By believing these fraudsters, you run the risk of being criminally charged or penalized, so in the end, it is better to report your assets — yes, all of them — when you file.
Scam #10: High-Income Individuals Who Don’t File Tax Returns
Believe it or not, there are some taxpayers who choose to just … not file a tax return. And believe it or not, there are scamming professionals out there aiming to convince you this is a good idea. The IRS takes this seriously. If you are considering this option, remember the Failure to File Penalty is higher than the Failure to Pay Penalty, meaning you are better off filing an accurate, timely return (and setting up a payment plan, if you are concerned about that) rather than not filing and hoping you get out of paying whatever taxes you owe.
Scam #11: Abusive Syndicated Conservation Easements
In this scam, dishonest promoters manipulate a part of the tax law that allows for conservation easements by inflating appraisals of underdeveloped land (i.e., the guise of a real estate investment) and engaging in bogus partnerships without a business purpose. These “deals” rarely help you out; instead, they benefit the promoters, who charge high fees, and clog the tax system with fraudulent tax deductions. (In the last five years, the IRS determined billions of dollars of deductions were wrongly claimed!) And if you are caught — which, you should expect to be, because the IRS takes a microscope to every single one of these “deals” — you can expect large fines and potential time in court.
Scam #12: Abusive Micro-Captive Insurance Arrangements
A high priority for the IRS, this scam sees professionals like accountants and wealth planners convince entity owners to pay for what they believe to be insurance coverage against unlikely events, events that are already being covered, or disingenuous business needs. Complete with sky-high premiums, the abusive structure does the opposite of protecting your organization’s tax safety — it opens you up to more risk as a ”micro-captive” to these “professionals” taking advantage of you. Be on the lookout for an offshore version of this too.
Consequences of falling for a Dirty Dozen scheme
It is important for taxpayers who have already taken part in transactions like these — or those who are thinking about doing so — to consult a tax professional before claiming any tax benefits they think they are owed.
Those taxpayers who have already claimed the purported tax benefits of one of these four “Dirty Dozen” arrangements on a tax return should file an amended return and go to an independent professional for guidance. If necessary, the IRS will examine the tax benefits from transactions like the ones depicted in the list and inflict penalties related to accuracy ranging from 20% to 40%, or a civil fraud penalty of 75% on any taxpayer who underpaid.
Our perspective on the latest batch of “Dirty Dozen” scams
This is not, of course, an exhaustive list of every scam the IRS has its eye on this year. But it does include some of the more common trends. The best advice we can give? If something looks too good to be true … it probably is. Consult your tax professional for guidance and know that it is in your best interest to stay aware of these nefarious arrangements, so you do not fall susceptible to additional penalties.
And remember, you cannot hide income from the IRS!
MGO’s Tax team brings more than 30 years of experience and is well versed in reviewing your return for compliance. We also stay up to date on the risks, pitfalls, and warnings issued by the IRS so you don’t have to. If you think you have been involved in or are in the process of being involved in one of the Dirty Dozen scams, we can help. Contact us today.