As long as there have been accounting practices and taxes, there have been scams to rip off taxpayers, which can cost the taxpayer significantly. Given the prevalence of these issues in the U.S., the IRS publishes an annual list of its “Dirty Dozen” tax scams that taxpayers should be aware of to avoid being taken advantage of. For the 2021 tax year, the IRS has decided to separate the Dirty Dozen into four specific categories:

  • pandemic-related scams such as Economic Impact Payments theft;
  • personal data scams such as phishing, phone scams and ransomware;
  • ruses focusing on unsuspecting victims like fake charities and elderly/immigrant
    fraud; and
  • cons that are used to persuade taxpayers to make unscrupulous actions, including syndicated conservation easements and Offer in Compromise mill scams.

Here’s a look at five of the Dirty Dozen scams so that you can be aware of these issues.


Top Five Dirty Dozen Tax Scams for 2021


Fake Charities

Many cases of tax fraud have to do with organizations claiming to be nonprofits, but actually are not. They’ll often set themselves up so that they can take advantage of natural disasters and tragedies, and lately, the COVID-19 pandemic has seen its share of scam artists. This can include phone calls asking for donations to the fake charity, often for disaster relief efforts. Always take the time to thoroughly investigate any charities you’re considering supporting, and don’t give in to pressure to give immediately. The IRS has a Tax Exempt Organization Search tool that is a great place to check the status of a charity, making it much easier to ensure your money is going where you intend it to, and that you’re gaining the tax benefits that you need.

Syndicated Conservation Easements

A syndicated conservation easement allows a landowner to provide an easement to a qualified organization which is usually a nonprofit. In these arrangements, the donor and receiving organization typically agree that development will be permanently restricted so that specific conservation objectives can be met. To add incentives to this process of conserving natural resources or properties of historical significance, there is a tax deduction available for the value of the land donated under the Internal Revenue Code. However, these arrangements can become abusive if the property owner is allowed to donate the property using inflated land appraisals, providing in turn an unfairly inflated tax deduction. The IRS has made a strong commitment to ending these types of schemes.

Abusive Captive Insurance Arrangements

For some insurers, the option of self-insuring is a promising option to consider. However, there can be some issues with this setup. Captive insurance is the term for when a taxpayer creates an insurance company that provides coverage, but in exchange, receives a tax-deductible premium. In abusive structures, people who are working as accountants, wealth planners and promoters will persuade closely-held entity owners to participate in this type of arrangement, but with excessive premiums that are used to work around the tax laws. For this reason, the IRS has begun to significantly increase enforcement against captive insurance companies that are abusing this loophole to help reduce their tax liability.

Improper Business Credit Claims

Taxpayers who are claiming research credits have to both evaluate and document research activity over a specific period of time so that they can establish the qualified research expenses that are paid for each qualified activity. When you don’t participate in or substantiate your qualified research activities, or when you don’t satisfy the requirements you need to undertake for qualified research expenses, the claim may be improper, which can lead to problems with an IRS when you improperly claim these research credits on your taxes. Make sure that you carefully check reports and studies to ensure they fulfill the requirements to claim the credits.

Improperly Monetized Installment Sales

If you’re doing installment sales of appreciated property, you can defer the recognition of those gains by only realizing the taxable income when payments have been received from the purchaser. If an intermediary purchased the appreciated property in exchange for installment notes, providing for interest payments first, you may find yourself in an improperly monetized installment sale, even though the principal is paid at the very end of the term. These arrangements give the seller the bulk of the proceeds while delaying capital gains recognition until the final installment note payment.

In Conclusion

Because the IRS can cause serious problems if you accidentally get involved in one of these schemes, you can avoid them by following the Dirty Dozen to ensure you don’t make these mistakes.

If you have any questions or need help checking your processes to ensure you don’t run afoul of the IRS, please contact your ALL tax advisor or call us at 617-738-5200.

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