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The IRS’s 2021 ‘Dirty Dozen’ Tax Scams: Schemes That Promote Abusive Arrangements

Fraudsters are always on the look out for the next big scam. Sometimes it’s as simple as sending an email pretending to be a family member or friend … but sometimes, unscrupulous promoters dangle the promise of giant tax deductions from abusive arrangements.

This is the last focus topic for the IRS’s 2021 “Dirty Dozen” — an annual list of 12 prominent or up-and-coming tax scams that Americans should keep a close eye on. And while many of this week’s schemes might sound somewhat niche, they’re common enough that the IRS has flagged them among their dozen most prominent concerns.

“To fight the evolving variety of these abusive arrangements, the IRS recently created the Office of Promoter Investigations (OPI) to focus on participants and the promoters of abusive tax avoidance transactions,” the IRS says. “OPI coordinates service-wide enforcement activities. The best defense for a taxpayer approached by a promoter is to show caution: If it sounds too good to be true, it probably is.”

Let’s dig into these scams:

The Dirty Dozen: Schemes That Promote Abusive Structures

The IRS highlights five common scams centered around tax-avoidance schemes:

Improper claims of business credits

The IRS has homed in on a particularly abusive scheme involving a research and experimentation business credit.

Businesses typically can claim a research credit by conducting qualified research activity. Of course, to qualify, that business must evaluate and appropriately document said research to establish the research expenses paid. However, some businesses have tried to claim the credit without substantiating — or in some cases, even participating in — said qualified research activities, or satisfying the specific requirements to claim the credit.

Improper monetized installment sales

In this case, promoters of monetized installment sales look for taxpayers who want to sell appreciated property but defer the recognition of any gains on the sale. An intermediary will buy appreciated property and provide an installment note in return. These notes typically see interest paid for first, then principal paid at the end of the term.

The IRS notes the seller receives most of the proceeds. However, they don’t recognize the gain until many years later, when the final payment on the installment note is made.

Syndicated conservation easements

This scheme sees promoters twist a provision of tax law for conservation easements through inflated appraisals of undeveloped land and partnerships.

“These abusive arrangements are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of a legitimate business purpose,” the IRS says.

The IRS says that not only do these transactions often grossly overstate the value of the easement purported donated to charity, they also often fail to comply with basic requirements for claiming a charitable deduction.

Abusive micro-captive arrangements

Businesses looking to arm themselves against unforeseen risks might fall prey to abusive “micro-captive” structures. In these schemes, promoters, accountants or wealth planners may persuade business and other entity owners to pay often excessive premiums for coverage that might “insure” plausible risk, fail to match real business needs or duplicate the taxpayer’s existing commercial coverages, the IRS says.

The agency says it has recently stepped up enforcement against a variation that uses offshore companies.

Potentially abusive use of the U.S.-Malta tax treaty

This particular tax scheme is fairly specific.

“Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer,” the IRS says. “Ordinarily gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds.”

The IRS says it’s evaluating the issue. It wants to determine whether these arrangements are valid, and whether the benefits should be available. The agency says it “may challenge the associated tax treatment.”

If It Sounds Too Good to Be True, It Might Just Be

As we’ve previously warned, if a tax deal sounds almost impossibly incredible, it probably is impossible — or worse, illegal.

Don’t let yourself get caught up in dangerous tax schemes. McManamon & Co. offers a wide array of services to small and midsize businesses, including tax services such as filing, planning and compliance. Learn more about the myriad ways we can help your company. Call us at 440.892.8900 or contact us online today.

Other Dirty Dozen Tax Topics

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