IRS Issues Warning as Tax Deadline Looms

The Internal Revenue Service (IRS) has issued its final warning to taxpayers ahead of next week's tax filing deadline.

As part of its annual "Dirty Dozen" fraud prevention campaign, the IRS has warned of bogus tax avoidance strategies and schemes with an international element that could impact taxpayers, businesses and professionals as the April 15 filing deadline is days away. The latest warning reminds taxpayers to be vigilant of fraudsters playing tricks on taxpayers, inviting them to use too-good-to-be-true schemes that could land them in serious trouble with the IRS while criminals make money off them.

The IRS highlighted two bogus tax avoidance strategies sometimes used by fraudsters: syndicated conservation easements and micro-captive insurance arrangements.

The former involves using a "restriction on the use of real property" as taxpayers may be able to claim "charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets Internal Revenue Code section 170 requirements."

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However, criminals can use this to their advantage by "syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested."

The IRS also warned about micro-captive insurance arrangements, also known as small captives, which are insurance companies whose owners elect to be taxed on a captive's investment income only. According to the IRS: "These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer's commercial coverages."

The second half of the IRS warning involves those who hold financial assets outside of the U.S. which must be reported to the government agency, with failure to report carrying penalties. Taxpayers are warned that "unscrupulous promoters "continue to lure U.S. persons into placing their assets in offshore accounts and structures, saying they are out of reach of the IRS."

The IRS warns that if taxpayers encounter these offers, they should know that "these assertions are not true" and that the government agency "can identify and track anonymous transactions of foreign financial accounts."

"Many of these schemes are promoted and advertised online, but all these schemes have one thing in common—they promise tax savings that are 'too good to be true' and will likely cause legal harm to taxpayers who use them," the IRS explains. "Whether anchored offshore or in the U.S., abusive transactions and schemes remain a high priority for the IRS. The IRS is always on the lookout for promoters and participants of these types of schemes and where appropriate, the IRS will challenge them and impose penalties."

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"Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility," said IRS Commissioner Danny Werfel. "Promoters continue to peddle elaborate schemes to reduce taxes and make a handsome profit.

"Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck."