 Internal Revenue Service IRS tax news! The Dirty Dozen! Beware of abusive tax avoidance schemes! The Dirty Dozen! No, no, Phil. I'm not talking about those donuts someone brought into the break room. Although, although whoever did bring those donuts in, Phil, they need to be fired. They need to be fired. Those donuts were about as appealing as a transgender dude's face on a beer can. The transgender beer being held by a hockey player who's dressed head to toe in completely gay garb. The transgender gay hockey player's other hand, holding on to the now hockey league mandated strap-on hockey stick for crying out loud. What? What's that, Phil? I'm not allowed to say that. Dad, don't worry, Phil. Thanks to the equity algorithms out there, nobody's listening anyways. For the Indians, one round on, let's say, one hit. That's all we got. One god-hit? You can't say god-hit on the air. Don't worry, nobody's listening anyway. Where was I? The Dirty Dozen! It sounds like a rogue's gallery of tax tricksters, each with their own devious methods. It's like, it's like there's, there's right-off woman who can transform a trip to the grocery store into like a business expense. And then you got loophole Larry, who's really creative. He can make income disappear almost as well as the big guy makes kickbacks disappear, you know, which is pretty amazing. You know, stay away from the tricksters, man. They're sneakier than like, they're sneakier than like a politician attempting to define what a woman is, which is, that's pretty sneaky. It's pretty sneaky business. You got to play some massive word games. As for me, the only dirty dozen I plan on dealing with is that pile of laundry I've been avoiding for the last two weeks. Plus, I have at least, I have at least a baker's dozen's worth of dirty dishes too. But whatever, I can eat off paper towels while wearing rinsed swimming trunks for months, if not years. No problem. So anyway, anyways, onto the, onto the tax news. Washington, today the Internal Revenue Service closed out the 2023 Dirty Dozen campaign. There's a link to that campaign here with a warning for taxpayers to beware of promoters peddling bogus tax schemes aimed at reducing taxes or avoiding them all together. These schemes take, can take many shapes ranging from abusive deals involving syndicated conservation easements and micro captive insurance arrangements. They can also involve international component such as hiding cash and digital assets offshore or using the Baltese foreign individual retirement accounts for foreign captive insurance. Quote, these tax avoidance strategies often target high income individuals seeking to reduce or eliminate their tax obligation. End quote, said IRS Commissioner Danny Warfell. So note, a lot of these dirty dozen ones we talked about or looked at some of them target the lower income side of things. Some of them are going to be targeting the higher income side of things. The lower income side, oftentimes you can imagine they're trying to capture personal information so they can file fraudulent tax returns. Often filing tax returns to try to get access to those refundable tax credits, which have been changing a lot over, over the years. Things like the earned income tax credits and the child tax credits. And so those would be things like the phishing emails you would expect having a wide net. And they actually might make the emails less sophisticated so that the people that actually click on the email are more likely to follow through the scam funnel, which is going to be going to possibly a website that they would have to enter credentialed information into the website and whatnot in order to get that information. And then you've got the higher income side of scamming, which is going to be more targeted because instead of having a shotgun approach and just trying to get a small percentage to go through their scam funnel, the strategy you would think would then be to target specific individuals and have a bigger gross profit per scam that takes place. And that's where you get these bigger kind of things that sound like they could be a legitimate kind of tax strategy or they might there might actually be some gray area in the tax code, because the tax code isn't exactly clear, but it still seems like not in the in the essence or in the intent of the tax code, and likely are going to be positions that the IRS are going to strongly work towards making building their case on. And so and so those would be more on the higher income side of things oftentimes note that a lot of focus has been on the lower income side of things in part because of all the stuff that happened with COVID. So COVID increased the amount that was just money coming out from the IRS increases in the refundable tax credits and stuff like that, which increased the targeting of the lower income side of things. But we also had on the high income side of things some things with related to the payroll taxes and that kind of stuff that could could affect businesses. But then oftentimes the high income side of things are these are these more kind of gray areas on the tax code with the irises is trying to nail down making a case for these particular items. Okay, so that said, quote, sometimes taxpayers are conned into believing they can participate in these schemes. People should always look for advice from an independent trusted tax professionals, not promoter focused on aggressively marketing and pushing questionable transactions and quote. So these marks the final day of the IRS annual dirty dozen campaign, a list of 12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more. Some items on the list are new and some make a return visit. While the list is not a legal document or a formal listing of agency enforcement priorities, it is intended to alert taxpayers in the tax professional community about various scams and schemes at large today. The IRS highlights the following dirty dozen items. You got the bogus tax advanced strategies. You've got the micro captive insurance arrangements. Okay, so what is that also called a small captive. A micro captive is an insurance company whose owners elect to be taxed on the captives investment income only abusive micro captives involved schemes that lack many of the attributes of legitimate insurance. So basically it's substance over form kind of situation. Right. It's not actually kind of insurance, but they're using that structure. So some strategies often include implausible risks, failure to match genuine business needs and and in many cases unnecessary duplication of the taxpayers commercial coverages. In addition, the quote premiums end quote paid under these arrangements are often excessive reflecting non arms length transactions. So they're not like market transactions. Abusive micro captive transactions continue to be high priority enforcement area for the IRS. The IRS has won all micro captive tax court and appellate court cases decided on their merits. So you would think if you had a scammer on the more sophisticated, you know, higher income side of things, they would be saying things like you would imagine, well, the tax code has these loopholes in it. And you know, that's just the way the tax code was written because the law was they don't know what they're doing Congress or something or else they did it on purpose for their own purposes. And you need to take care. You need to take advantage of these loopholes in basically the tax law that they just are there would be kind of the argument and possibly when the law first is in place or when these things first start, you might say, well, it isn't in a kind of a gray area. But the but clearly it's not in the intent of the law, you would think right. And so the the and then the IRS, you would think is going to build their case, which is what they are arguing here. So the IRS is saying the IRS has won all micro captive court cases. That means the IRS's position is becoming stronger and stronger. And when we think about the position that people are taking, we can look at the actual law itself. And then we and then if it's not crystal clear in the law itself, we got to go on down to court cases possibly. And the IRS is saying we're building a case on these court cases. So he better watch out because we're on the we're on these and we're winning. So 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 conservation easement transferred to a charity. If the transfer meets the requirements of an internal revenue code section 170 syndicated conservation easements are arrangements that make the dirty dozen list again in 2023 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 abuse of arrangements which generate high fees for promoters attempt to game the tax system with grossly inflated deductions. So as part of the conservation appropriations act of 2023 Congress amended section 170 to curb certain abuse of conservation easement transactions. The IRS is committed to ensuring compliance with conservation easement deduction law as amended in the 2023 legislation. So I think the idea here was they're trying to get a charitable contribution and basically they paid for the they're putting the property into the charity and claiming a higher price than they paid for the property basically. And the idea would be that they got maybe an appraisal on the property and the appraisal was quite high on the property possibly or something you know to that effect. And so then the deduction would be a lot higher than you would think it would based on an estimate. I believe that's the general structure here but apparently they actually changed the law here. I think the IRS was going after these before any change to the law and was doing well on winning those and now they so the IRS is committed to ensuring compliance. So as part of the of the appropriations act of 2023 Congress amended section 170 to curb certain abuse of conservation easement transactions are in any case schemes with international elements. You also got the offshore accounts and digital assets. So international tax compliance remains a high priority for the IRS. The IRS continues to scrutinize taxpayers attempted to hide assets and offshore accounts and accounts holding digital assets such as cryptocurrency. The IRS reminds U.S. persons that they are taxable on their worldwide income unless they can establish there is a statutory or treaty exemption. The IRS continues to identify individuals who attempt to conceal income in offshore banks brokerage accounts digital asset accounts and nominee entities. The IRS scrutinized structured transactions private annuities employee leasing schemes foreign trusts the use of nominee ownership and other arrangements used to conceal taxable income beneficial owners and assets. So to compliment its enforcement investigations the IRS requires individuals holding foreign assets and the third parties to report to the IRS on foreign assets foreign accounts foreign entities and digital assets reporting requirements carry penalties for failure to file asset protection Professionals and unscrupulous promoters continue to lure U.S. persons into placing their assets and offshore accounts and structures saying they are out of reach of the IRS. Similarly unscrupulous promoters recommend recommend digital assets as being un untraceable and undiscoverable by the IRS. These assertions are not true the IRS can identify and track anonymous transactions of foreign financial accounts as well as digital assets. Many of these schemes are promoted and advertised online but all these schemes have one thing in common they promote savings that are too good to be true and will likely cause legal harm to taxpayers. We got the Maltese individual retirement arrangement misusing treaty. So these arrangements involve U.S. citizens or residents who attempt to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta or potentially other host countries. The participants in these transactions typically lack any local connection to the host country and unlike U.S. law for individual retirement arrangements. The host country's laws 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 the foreign arrangement as a quote pension fund end quote for U.S. tax treaty purposes the U.S. taxpayer misconstrues the relevant treaty provision and improperly claims and exemption from U.S. income tax on gains in earnings. So you've got your kind of retirement situation here. They've got a different structure of the retirement system over there which would be not in alignment to the rules. And so they're saying obviously there's a treaty between the countries in terms of how to deal with the taxes and the IRS is saying what's happening here is not in alignment with that. They're misdruing the tax treaty and distributions from the foreign individual retirement arrangement. Puerto Rican and other foreign captive insurance. So in these transactions U.S. business owners are closely held entities participate in a purported insurance arraignment with Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner or a related entity claims a deduction for amounts paid as premiums for quote insurance coverage in quote provided by a front team carrier which ensures the quote coverage in quote with the Puerto Rican or other foreign corporation. Despite being liable labeled as insurance these arrangements lack many of the attributes of legitimate insurance like the micro captive described above. The characteristics of the purported insurance arrangements typically will include one or more of the following. So this is like a substance over form kind of thing. It's formed as an insurance looks like in the contract but in substance it's not right is what they're kind of saying. So implausible risks covered or duplicative coverage of risks already covered by commercial insurance. So if there's a risk that's implausible it's just not going to happen and you have insurance for it and you're paying the insurance company. It's like why would you be doing that doesn't or if you're paying for double insurance for something that's already covered then that seems unusual. Why would why would that be the case. So excessive premiums indicative of non arms links pricing. So if you're if the insurance for some reason costs way over what you would expect the insurance premium to cost then something funny seems like it's going on and lack of business purpose for entering the arrangement. So there's no business reason why the arrangement was in place that looks apparent other than possibly tax avoidance. So where appropriate the IRS will challenge the purported tax benefits from these types of transactions and impose penalties. The IRS criminal investigation division is always on the lookout for promoters and participants of these types of schemes. Taxpayers should think twice before including questionable arrangements like this on their tax returns. After all taxpayers are legally responsible for what's on their return not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know and trust the IRS warns anyone thinking about using one of these schemes or similar ones that the agency continues to improve investigation and enforcement in these areas by utilizing new and evolving data and analytic tools and enhanced document matching. Whether rather anchored offshore or in the U. S. abusive transactions and schemes remain a high priority for the IRS. The IRS Office of Chief Counsel continues to hire additional attorneys. Some more attorneys over to help the agency combat abusive arrangements including syndicated conservation easements micro captive transactions and others. The IRS has also created the Office of Fraud Enforcement otherwise known as the O. F. E. and Office of Promoter Investigations. The O. P. I. to coordinate service wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effective tax evasion. So how to report as part of the dirty dozens awareness effort the IRS encourages people to report individuals who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns to report and abusive tax scheme or tax return preparer. People should mail or fax completed form 14242 reports suspected abusive tax promoters or preparers. There's a link to that here and any supporting materials to the IRS lead development center in the Office of Promoter Investigation. There's a mailing address alternatively taxpayers and tax practitioners may send the information to the IRS whistleblower offers for a monetary reward for more information. See abusive tax schemes and abusive tax return preparers. There's links to that stuff here. There'll be a link to this in the description.