Real estate professionals never let a good crisis go to waste — but neither do scammers. As the double-dip recession takes a turn heading into 2023, tax scams are bound to crop up throughout California’s most vulnerable housing markets.

The architects of tax avoidance schemes will continue to sell panic-stricken consumers the same lies which resurface in every recession. The snake oil peddlers of today may entice their victims with new packaging, but the ingredients are toxic to your clients’ hard-won equity all the same.

As the first line of defense for homebuyers and sellers, real estate professionals need to familiarize themselves with the latest fraudulent and abusive tax schemes. Brush up on the top 10 taxpayer scams in 2022, courtesy of the Internal Revenue Service (IRS).

1. Unlawful trusts

An abusive or unlawful trust promises to reduce or eliminate taxable income or hide assets from the IRS in exchange for control of a beneficiary’s trust. These are empty promises with devastating results, as the trust might gain title to the victim’s property, leaving them with nothing. The IRS reserves the right to administer civil penalties or criminal prosecution against those who take part in abusive tax-avoiding trust arrangements.

2. Charitable Remainder Annuity Trust (CRAT)

These types of charitable remainder trusts seek to eliminate a seller’s taxable gain profits resulting from the sale of an asset subject to taxation, such as real estate. These arrangements change how the seller reports the taxation of their sale, by claiming it as a gift transaction. However, the CRAT is irrevocable and gives the seller no access to or control over their own assets in the trust.

3. Offshore accounts

Concealing assets in offshore accounts is an infamous tax avoidance method favored by the ultra-rich, but some shady foreign banks accept initial deposits of just a few hundred dollars. Fraudsters use this strategy to evade Uncle Sam by hiding income in international banks, brokerage accounts or nominee entities. Beware — caching cash in an offshore account does not cast it out of reach of the U.S. tax system since U.S. citizens are required under penalty of perjury to report income from offshore funds and other foreign holdings.

4. Digital asset reporting

Digital assets such as cryptocurrency are subject to taxation, despite the popular misconception that digital asset accounts are undetectable by American tax authorities. The IRS clears the air by reasserting that digital assets are subject to taxation. By failing to disclose such assets, taxpayers will set themselves up for possible civil fraud penalties and criminal charges.

5. Foreign individual retirement arrangement (IRA)

This scheme involves the taxpayer making contributions to a foreign IRA and improperly claiming the contributions as a pension fund. Thus, they misconstrue the arrangement as a tax treaty exempt from U.S. income tax levies. Malta is a popular location for these transactions, though this scam is possible with any foreign country allowing IRA contributions of assets other than cash, or one which does not limit contributions based on earned income.

6. Foreign captive insurance

A captive insurance transaction is an insurance arrangement involving U.S. entities or corporations with few shareholders. Here, the owners claim tax deductions due to insurance coverage through a U.S.-based fronting carrier which in turn reinsures the coverage with a Puerto Rican or other foreign corporation. These insurance arrangements typically lack a business purpose for entering into the arrangement.

7. High income non-filers

Taxpayers who choose not to file a tax return, especially high-income earners who make over $100,000 a year and have a legal requirement to file, are on the IRS’s radar as a top priority. The IRS strives to establish fairness towards those who do comply with the law by filing their returns and paying their taxes by issuing penalties to those who don’t.

8. Monetized installment sales

These transactions inappropriately use installment sale rules so that the seller receives the sales proceeds through purported loans in the year of the sale. In this “too good to be true” scenario, the seller of an asset will receive the cash right away and pay the tax in 30 years. The IRS may levy penalties up to 75% of any underpayment of tax for those who take advantage of this tax avoidance strategy.

9. Abusive syndicated conservation easements

Syndicated conservation easements involve the use of inflated appraisals of undeveloped land and business partnerships devoid of a legitimate purpose, other than to game the tax system. Under these arrangements, investors receive grossly inflated tax deductions on the sale of a plot of land on which they donate a conservation easement. The IRS has examined hundreds of these deals involving billions of dollars of improperly claimed deductions, and brought hundreds of them to court, with more likely to end up in court in the future.

10. Abusive micro-captive insurance arrangements

Micro-captive insurance arrangements involve owners of closely held entities participating in schemes lacking the typical attributes of insurance. Coverages may insure plausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages. The insurance premiums paid under these arrangements are often excessive and used to claim tax avoidance. The IRS continues to investigate and enforce against these micro-captive arrangements.

The IRS reminds taxpayers to watch out for and avoid advertised tax avoidance schemes. Many of these schemes are promoted online, promising tax savings that are too good to be true. These arrangements will likely cause taxpayers to legally compromise themselves and are best to be avoided.

For more information, visit the IRS website.

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