The tenth dirty dozen tip from the IRS: Watch out for schemes aimed at high-income filers. Tax scams aimed at wealthy taxpayers should be cautioned as taxpayers are urged to resist questionable tax practitioners and independent promoters. It’s commonly found that these tax schemes involve things like Charitable Remainder Annuity Trusts and Monetized Installment Sales.
“Taxpayers should beware of potentially abusive arrangements and promoters pushing them. People should seek out trusted, reputable tax advice and not be fooled by aggressive advertising and sales pitches,” explained IRS Commissioner Danny Werfel.
Breaking down the schemes aimed at high-income filers:
Charitable Remainder Annuity Trust (CRAT)
Charitable Remainder Trusts are irreversible trusts that let taxpayers donate assets to charity and draw annual income for life or for a specific period of time. CRATs pay a specific dollar amount each year.
False promoters and advisors like to misuse these trusts to scam taxpayers to eliminate ordinary income and/or capital gain on the sale of a property. By misapplying the rules under CRAT donations the taxpayer, or beneficiary, treats the remaining payment as an excluded portion representing a return of investment for which no tax would be due.
Monetized Installment Sales
In this tax scheme, false promoters find taxpayers seeking to defer the recognition of gain upon the sale of appreciated property. In exchange for a hefty fee, promoters facilitate a purported monetized installment sale. In these arrangements, it's typical to see the seller get the majority of the proceeds.
These are just two examples of tax schemes that taxpayers should avoid this filing season. It is now found that advertisements exist online and are targeted at wealthy taxpayers. The IRS reminds taxpayers to always consider these types of arrangements carefully and fully review the legal requirements with a trusted tax professional.
It’s imperative to remember that taxpayers are legally responsible for what is on their tax return, not the practitioner or promoter who entices them into a possible tax scam. Always think twice before submitting a return that seems too good to be true.
For more information on fraud and tax scams, visit our Tax Fraud Prevention webpage.