Internal Revenue Service Reveals ‘Dirty Dozen’ Tax Scams for 2022 | Fox Rothschild LLP


The Internal Revenue Service has announced the first installment in its annual “Dirty Dozen” list of tax scams. Published annually, the “Dirty Dozen” includes the twelve most common tax scams that taxpayers may encounter, and is a strong indicator of where the IRS will focus its enforcement resources. The first four entries on the “Dirty Dozen” are potentially abusive arrangements involving charitable residual annuity trusts, Maltese individual pension arrangements, foreign captive insurance and monetized installment sales. In the coming days, the IRS will announce the eight additional tax scams that complete the “Dirty Dozen” for 2022.

In a press release, IRS Commissioner Chuck Rettig warned that “[t]Taxpayers should stop and think twice before including these dodgy arrangements on their tax returns. Taxpayers are legally responsible for what is on their return, not a promoter making promises and charging high fees. Taxpayers can help end these arrangements by relying on reputable tax professionals they know they can trust.

The top four scams on the “Dirty Dozen” list are described by the IRS as follows:

Use of Charitable Remainder Annuity Trust (CRAT) to eliminate taxable gains. In this transaction, the appreciated property is transferred to a CRAT. Taxpayers erroneously claim that the transfer of appreciated assets to the CRAT gives those assets an increase in fair market value basis as if they had been sold to the trust. The CRAT then sells the property but does not recognize the gain due to the increase in the claimed base. The CRAT then uses the proceeds to purchase a Single Premium Immediate Annuity (SPIA). The beneficiary declares, as income, only a small part of the annuity received from the SPIA. The recipient treats the remaining payment as an excluded portion representing a return on investment for which no tax is due.

Maltese (or foreign) pension schemes abusing the Treaty. In these transactions, US citizens or residents attempt to avoid US tax by making contributions to certain foreign individual pension schemes in Malta (or possibly other foreign countries). In these transactions, the individual generally does not have a local connection and local law allows contributions in a form other than cash or does not limit the amount of contributions based on income from employment or business. independent activities. By asserting that the foreign arrangement is a “pension fund” for US tax treaty purposes, the US taxpayer is claiming an exemption from US income tax on income and distributions from the foreign arrangement.

Puerto Rican and other foreign captive insurance. In these transactions, U.S. owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign company with separate cell agreements or asset plans in which the U.S. owner has an interest. financial. The U.S.-based person or entity claims deductions for the cost of “insurance coverage” provided by a front insurer, who reinsures the “coverage” with the foreign company. Features of insurance agreements will typically include one or more of the following: implausible risks covered, arm’s length pricing, and lack of a commercial purpose for entering into the agreement.

Monetized installment sales. These transactions involve the use of the installment sale rules in Section 453 by a seller who, within one year of selling a property, actually receives the proceeds of the sale in the form of loans. In a typical transaction, the seller enters into a contract to sell an appraised asset to a buyer for cash, and then sells the same asset to an intermediary in return for an installment payment. The intermediary then sells the property to the buyer and receives the purchase price in cash. Through a series of related steps, the seller receives an amount equal to the selling price, less various transaction fees, in the form of a non-recourse, unsecured loan.

The IRS recommends that taxpayers who have already claimed tax benefits from any of these four transactions consider taking corrective action, such as filing an amended return and seeking independent advice. If applicable, the IRS will challenge the purported tax benefits of transactions on this list and may impose accuracy penalties ranging from 20% to 40%, or a civil fraud penalty of 75% of any underpayment of tax.

To combat the growing variety of these potentially abusive transactions, the IRS created the Promoter Investigations Office to coordinate enforcement activities and focus on participants and promoters of abusive tax avoidance transactions. . The IRS has a variety of means to find potentially abusive transactions, including reviews, promoter investigations, whistleblower claims, data analysis, and review of marketing materials.

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