WASHINGTON – The Internal Revenue Service wraps up the 2024 Dirty Dozen campaign with a warning to taxpayers regarding promoters selling bogus tax strategies and fraudulent offshore schemes designed to reduce or avoid taxes altogether.
Various fraudulent schemes threatening taxpayers can take different forms, including exploitative agreements related to syndicated conservation easements and micro-captive insurance arrangements. These schemes may also have an international aspect, such as concealing money and digital assets in foreign accounts or using foreign captive insurance and Maltese foreign individual retirement accounts.
“Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” said IRS Commissioner Danny Werfel. “Promoters continue to peddle elaborate schemes to reduce taxes and make a handsome profit. Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.”
Today is the last day of the IRS annual Dirty Dozen campaign. Started in 2002, the IRS' annual Dirty Dozen campaign lists 12 scams and schemes that put taxpayers, businesses and the tax professional community at risk of losing money, personal information, data and more. While the Dirty Dozen is not a legal document or a formal listing of agency enforcement priorities, the education effort is designed to raise awareness and protect taxpayers and tax pros from common tax scams and schemes.
Today’s final installment of the 2024 Dirty Dozen series includes the eleventh and twelfth items on the list: bogus tax avoidance strategies and schemes with an international element. There are several parts in each of these lists which reflects that wide range of schemes and scams that taxpayers can face. Although the IRS focuses on 12 items in the Dirty Dozen list, the agency reminds taxpayers there are many more items that taxpayers should be wary of throughout the year given the complexity of the tax system and the evolving nature of these scams.
Bogus tax avoidance strategies include syndicated conservation easements, micro-captive insurance
Syndicated conservation easements
A conservation easement is a restriction on the use of real property. Generally, taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets Internal Revenue Code section 170 requirements.
In abusive arrangements, promoters are syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested. These abusive arrangements, which generate high fees for promoters, attempt to game the tax system with grossly inflated tax deductions.
As part of recent legislation, Congress amended section 170 to curb certain abusive conservation easement transactions. The IRS is committed to ensuring compliance with the conservation easement deduction law as amended and will continue to keep an eye on transactions that are “too good to be true.”
Micro-captive insurance arrangements
Also called a small captive, a micro-captive is an insurance company whose owners elect to be taxed on the captive's investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages. In addition, the “premiums” paid under these arrangements are often excessive, reflecting non-arm’s length pricing.
Abusive micro-captive transactions continue to be a high-priority enforcement area for the IRS. The agency has prevailed in all micro-captive Tax Court and appellate court cases decided on their merits since 2017.
Schemes involving international elements include Maltese retirement arrangements, digital assets
The Foreign Account Tax Compliance Act (FATCA) plays a key part in combating tax evasion by U.S. persons holding accounts and other financial assets offshore. It requires most U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS. It also requires certain foreign financial institutions to report directly to the IRS about financial accounts held by U.S. taxpayers. These institutions include not only banks, but also other financial institutions, such as investment entities, brokers and certain insurance companies. Reporting requirements carry penalties for failure to file.
Unscrupulous promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures, saying they are out of reach of the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts.
Many of these schemes are promoted and advertised online, but all these schemes have one thing in common - they promise tax savings that are “too good to be true” and will likely cause legal harm to taxpayers who use them.
Misusing a tax treaty with Maltese individual retirement arrangements
This scheme involves U.S. citizens or residents attempting to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta or another country. These countries 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
A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include:
- Convertible virtual currency and cryptocurrency.
- Stablecoins.
- Non-fungible tokens (NFTs).
Unscrupulous promoters often recommend digital assets as being untraceable and undiscoverable by the IRS. However, the truth is that the IRS can identify and track anonymous transactions of digital assets around the globe.
For federal tax purposes, digital assets are treated as property. General tax principles applicable to property transactions apply to transactions using digital assets.
Reporting digital asset income
Transactions involving a digital asset are generally required to be reported on a federal tax return. For example, an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2023, must use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses.
A taxpayer who disposed of any digital asset by gift may be required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business.
Eye on compliance
Where appropriate, the IRS will challenge the purported tax benefits from transactions in today’s Dirty Dozen and other questionable arrangements and impose penalties where needed. The IRS Criminal Investigation Division continues to seek out promoters and participants of these types of schemes.
As a reminder, taxpayers should:
- Think twice before including questionable arrangements like this on their tax returns, as they are responsible for what’s on it once signed.
- Rely on a reputable tax professional they know and trust.
IRS remains vigilant
Whether anchored offshore or in the U.S., abusive transactions and schemes remain a high priority for the IRS. The IRS is always on the lookout for promoters and participants of these types of schemes and where appropriate, the IRS will challenge them and impose penalties.
The IRS continues to improve investigation and enforcement in these areas by utilizing new and evolving data analytic tools and enhanced document matching.
Report fraud
As part of the Dirty Dozen awareness effort regarding tax schemes and unscrupulous tax return preparers, the IRS urges individuals to report those who promote abusive tax practices and tax preparers who intentionally file incorrect returns.
To report an abusive tax scheme or a tax return preparer, people should use the online Form 14242, Report Suspected Abusive Tax Promotions or Preparers, or mail or fax a completed paper Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.
Mail:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677 3405
Fax: 877 477 9135
Taxpayers and tax professionals can also submit this information to the IRS Whistleblower Office, where they may be eligible for an award. For details, please refer to the sections on Abusive Tax Schemes and Abusive Tax Return Preparers.
