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IRS warns taxpayers about new, hard-to-grasp “transaction” scams

The agency reminds taxpayers that if they fall for these scams, they might be held accountable

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Income tax filing day may have come and gone, but the IRS warns taxpayers that scammers haven’t moved an inch. In fact, the agency says that in its "Dirty Dozen" list of scams, that there are four potentially abusive ones starting to creep up that it’s got its eyes on, and for the time being, the public needs to keep its eyes open, too.

The four transactions involve charitable remainder annuity trusts, foreign captive insurance, monetized installment sales, and Maltese individual retirement arrangement, a weird tax shelter that came about during the first Obama administration.

How these scams play out

The bottom line for the scams that the IRS wants the public to be aware of is all promise tax savings that are too good to be true. However, once a taxpayer falls for it, they may legally compromise themselves instead of saving on their tax obligations.

Maltese tax option: Scammers seem to love the Maltese rip-off because taxpayers are likely to be unfamiliar with it and it’s not something simple like taking a deduction for donating clothes to Goodwill. The Maltese tax option is something where a U.S. taxpayer could avoid U.S. tax by making contributions to certain foreign individual retirement arrangements in Malta (or other foreign countries).

The Wall Street Journal says that scammers work the angle that Malta plans can significantly lower U.S. taxes on the sale of high-value assets like stock, real estate, or cryptocurrency. Instead of paying a top federal rate of 23.8% on capital gains, Americans age 50 or older can fund a Malta pension with those types of assets, turn around and sell them, and then withdraw large amounts of the money tax-free.

Puerto Rican and other foreign captive insurance: The angle here is that Americans who own closely held entities can participate in a pretend insurance arrangement with a Puerto Rican (or other foreign) corporation which can help the taxpayer claim deductions for the cost of “insurance coverage.”

The IRS says the trademarks of the purported insurance arrangements usually include one or more of the following: implausible risks covered, non-arm’s-length pricing, and lack of business purpose for entering into the arrangement.

Use of charitable remainder annuity trust (CRAT) to eliminate taxable gain: In this – another not-easy-to-understand gimmick – appreciated property is transferred to a CRAT so that taxpayers can improperly claim the transfer of the appreciated assets to the CRAT at fair market value as if they had been sold to the trust. CRATs are real things, but if someone you don’t know or have done business with tries to sell you on getting one, your scam detector should go off immediately.

Monetized installment sales: This transaction scam involves the improper use of the installment sale rules under section 453 where a seller receives the sales proceeds through purported loans anytime during the first year they own a property.

“In a typical transaction, the seller enters into a contract to sell appreciated property to a buyer for cash and then purports to sell the same property to an intermediary in return for an installment note,” the IRS explains. “The intermediary then purports to sell the property to the buyer and receives the cash purchase price.” 

The IRS reminds taxpayers to watch out for and avoid these schemes, many of which are now advertised online. 

"Taxpayers should stop and think twice before including these questionable arrangements on their tax returns," said IRS Commissioner Charles Rettig. "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 they can trust."

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