The Internal Revenue Service has ended its annual Dirty Dozen campaign, which it bills as the “worst of the worst” tax scams. The latest scams in the series leave a lot to unravel. To round out the series, the agency highlights schemes that clearly target high-net-worth individuals, including fake charities seeking to take advantage of wealthy taxpayers, illegal tax deductions and tax avoidance strategies, and unscrupulous tax preparers. taxes.
Tax Day may be behind us, but HNWIs often take extensions to file their taxes, given the complexity of their returns. Moreover, many of these schemes remain a concern throughout the year.
Fake charity
Fraudulent organizations are quick to take advantage of well-meaning individuals seeking to make donations during times of natural disasters and other tragic events, such as acts of war. Wealthy individuals often give generously, making them a prime target for fake charities. The IRS reminds taxpayers that only donations to legitimate tax-exempt organizations qualify for a tax deduction and warns individuals to be wary of fraudulent charities that use similar names to legitimate charities, often through fake email or caller IDs. to pressure their victims into making payments or revealing personal information such as Social Security numbers or credit card numbers. Not only will the taxpayer end up losing money and deductions, but they can also set themselves up as victims of identity fraud.
Remind clients to always do their due diligence and check out a charity before donating, including using the IRS website's Tax Exempt Organization Search (TEOS) tool to ensure legitimacy.
Illegal tax schemes and improper deductions
The IRS then warns wealthy individuals about tax traps set up by shady tax practitioners. If the tax strategy sounds too good to be true, it probably is. Clients should be wary of tax preparers who promote aggressive schemes and strategies to reduce taxes, running the gamut from “inflated art donation deductions“ to aggressive superannuation charitable remainder trusts and detailed shelters that maneuver to delay the payment of property gains.” While the art of estate planning often involves carefully designed tax-saving strategies within the letter of the law, IRS Commissioner Danny Werfel warns HNWIs about requests for unrealistic tax structures that can leave taxpayers with civil or criminal tax penalties.
One such practice is encouraging taxpayers to buy art, often at a “discounted” price. The Promoter may provide additional services, such as storage, transportation, and arranging the valuation and donation of the art. The unscrupulous promoter promises that the art is worth much more than the purchase price.
The scheme encourages the buyer to donate the art after waiting at least a year and claim a tax deduction for an inflated fair market value that is significantly more than what they paid for the artwork. The IRS warns that it is staffed with art appraisers who can determine the true value and to be wary of promoters who “suggest that taxpayers donate art each year and allow them to purchase a quantity of art that guarantees an amount specific deductible” or even organize certain charities. to receive donations.
The IRS also cautions practitioners who misuse trusts, such as charitable remainder trusts, to eliminate capital gains and those who recommend schemes such as deferring recognition of gain on the sale of appreciated property and then arranging an abusive shelter through the sale theirs in installments.
Unscrupulous practitioners
Worse yet, the IRS reminds wealthy taxpayers to avoid practitioners who promote false tax strategies and fraudulent offshore schemes designed to reduce or avoid taxes altogether.
You may wonder how an HNWI could fall prey to a corrupt preparer, since these individuals usually have a solid team of advisors and planners by their side. “Generally, they're not preparers, they'll have a salesperson talk about very advanced and 'copyrighted' strategies. They'll explain that 'most preparers' don't understand the tax code like they do .They will sometimes feature “tax opinion” letters from the tax attorneys they work with on how the copyright strategy works. In most cases, their former clients are the ones who refer them young people,” said Duncan Campbell, head of Baker Tilly's private wealth practice in Frisco, Tex., explaining how these elaborate schemes work.
Last but not least, the IRS urges taxpayers to be wary of “ghost preparers,” that is, preparers who do not sign the tax returns they prepare. According to Campbell, “These pop-up scammers are known to target HNWIs and encourage them to take advantage of tax credits and benefits for which they do not qualify. In return, these ghost preparers charge a large percentage of the refund or steal entire refunds Then they disappear, leaving well-intentioned taxpayers to deal with the consequences.”