Every year, the Internal Revenue Service publishes a list of 12 scams currently threatening the personal and financial information of taxpayers and tax professionals: The “Dirty Dozen” tax scams.
This week, we’re covering the last six scams that the IRS highlighted for 2021. (If you want to read about the first six “Dirty Dozen” scams, check out our previous blog: “Watch Out for the “Dirty Dozen” Tax Scams! (Part 1).”
What are the last six Dirty Dozen scams of 2021?
Unemployment Insurance Fraud
Identity-related unemployment insurance scams ramped up in the wake of millions of Americans losing their jobs due to the pandemic—but that’s just one type of unemployment fraud the IRS wants on the radar for states and employers.
Here are four other types of unemployment insurance fraud outlined by the agency:
- Employer-employee collusion fraud: The employee receives unemployment insurance payments while the employer continues to pay the employee reduced, unreported wages.
- Misrepresentation of income fraud: An individual returns to work and fails to report the income to continue receiving unemployment insurance payments, or in an effort to receive higher unemployment payments, applicants claim higher wages than they actually earned.
- Fictitious employer-employee fraud: Filers falsely claim they work for a legitimate company, or create a fictitious company, and supply fictitious employee and wage records to apply for unemployment insurance payments.
- Insider fraud: State employees use credentials to inappropriately access or change unemployment claims, resulting in the approval of unqualified applications, improper payment amounts, or movement of unemployment funds to accounts that are not on the application.
If unemployment payments are issued by a state the beneficiary doesn’t live in, more than one state for the same period, to someone whose name isn’t on the account (or more than one person), it may be a sign of unemployment fraud.
Syndicated Conservation Easements
The IRS wants taxpayers who fraudulently inflate the value of undeveloped land and partnerships in order to get a tax deduction to know that they’re on to these schemes. As you might have guessed, the agency is actively pursuing abusers in court. In other words, honesty is the best policy (which is essentially the theme for the rest of the “Dirty Dozen!”)
Abusive Micro-Captive Arrangements
Taxpayers should beware of any accountant or financial planner who suggests what the IRS calls “abusive ‘micro-captive’ structures.” To illustrate how this scam works, the IRS says that “owners of closely held entities … ‘insure’ implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s commercial coverages.”
The IRS notes that they have begun offering settlements to taxpayers involved in these schemes, and warns that those who are using offshore captive insurance companies are not exempt from audit—those who don’t take the offer could have their own day in court.
Potentially Abusive Use of the US-Malta Tax Treaty
There might be a new kid on the tax-fraud block. Maybe one of the more creative ways someone could try to avoid paying property tax, this member of the Dirty Dozen involves the US-Malta Income Tax Treaty. While the agency hasn’t confirmed this is an abusive use of the treaty, the agency says the scheme goes like this:
“[Adopters] take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds.”
Improper Claims of Business Credits
It turns out that the IRS does not turn a blind eye to businesses that try to defraud the US government for tax credits. The agency put those that claim the research and experimentation credit without actually performing, paying for, or documenting qualifying research on notice in this year’s “Dirty Dozen.”
To make sure businesses stay on the straight and narrow, the IRS notes that “taxpayers must evaluate and appropriately document their research activities over a period of time to establish the amount of qualified research expenses paid for each qualified research activity.”
Improper Monetized Installment Sales
In another reminder of how important it is to find ethical tax professionals, the final scam in this year’s list is “improper monetized installment sales.” Illegal tax shelters are obviously a no-no, but even honest taxpayers can be tricked into shady dealings. Just like with phishing scams, it’s important to know the signs of an abusive tax arrangement.
“These transactions occur when an intermediary purchases appreciated property from a seller in exchange for an installment note, which typically provides for payments of interest only, with principal being paid at the end of the term,” the IRS explains. “In these arrangements, the seller gets the lion’s share of the proceeds but improperly delays the gain recognition on the appreciated property until the final payment on the installment note, often slated for many years later.”
And that wraps up the 2021 “Dirty Dozen” tax scams!
Remember, sharing information about scams can keep taxpayers from falling victim to or inadvertently participating in tax-related fraud. So, spread the word!