IRS warns high-income taxpayers: Beware these tax-avoidance schemes

By Josh Dukelow, gift planning officer

In June, the IRS issued its annual “Dirty Dozen” list, highlighting specific tax-planning strategies that might trigger further review for potential tax-avoidance. They are hiring up to 200 additional attorneys to identify such arrangements, and said they are “focused on high-income taxpayers who engage in various types of tax violations.”

In addition to pandemic-related scams and risks to tax-filers’ personal information (see links below), the IRS highlighted four strategies it says are relevant to high-net-worth individuals:

• Concealing assets in offshore accounts and improper reporting of digital assets. Stories of people “evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities” are not new. But the IRS says digital assets like cryptocurrency are being used in a similar way. “[T]here is an incorrect perception that digital asset accounts are undetectable by tax authorities.”
• Failure to file a tax return. Failure to file a tax return, especially among those making more than $100,000 in annual income, “represents a compliance problem that continues to be a top priority for the IRS.” The Failure to File Penalty is bigger than the Failure to Pay Penalty (5% of unpaid taxes vs 0.5%, capped at 25% of unpaid taxes), and if the failure is deemed fraudulent the Failure to File Penalty jumps to 15% with a 75% cap.
• Abusive syndicated conservation easements. Certain historic preservation and natural conservation easements are eligible for a tax deduction. But the IRS sees abuse of this provision when “using inflated appraisals of undeveloped land… and partnership arrangements devoid of a legitimate business purpose.” Due to the chances of abuse, “the IRS examines 100 percent of these deals.”
• Abusive “micro-captive insurance” arrangements. Insurance coverage is part of a responsible financial plan, but the IRS warns it may not always be what it seems. For example, the IRS says that some policies “may ‘insure’ implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages” and that premiums paid for these policies “are often excessive and are used to skirt the tax law.”

Responsibly reducing your tax bill through thoughtful financial and estate planning is smart. You get to direct more of your resources to the people and places that matter most, like family and community causes. But be aware that the IRS is looking for what it considers questionable arrangements, and high-net-worth individuals and families are an enforcement priority for them.

Learn more:

• About these schemes and IRS enforcement priorities
• Tax scams the IRS is watching for in 2022
• Pandemic-related tax scams
• Tax scams that target your personal information

If you have any questions about the IRS “Dirty Dozen” list, or want to talk about using your philanthropic capital for good, reach out to me at jdukelow@cfgreateratlanta.org.