WASHINGTON — The Internal Revenue Service today said using
abusive tax shelters and structures to avoid paying taxes continues to be a
problem and remains on its annual list of tax scams known as the “Dirty Dozen”
for the 2015 filing season.
"The IRS is committed to stopping complex tax avoidance
schemes and the people who create and sell them," said IRS Commissioner
John Koskinen. "The vast majority of taxpayers pay their fair share, and
we are warning everyone to watch out for people peddling tax shelters that
sound too good to be true.”
Compiled annually, the “Dirty Dozen” lists a variety of
common scams that taxpayers may encounter anytime but many of these schemes
peak during filing season as people prepare their returns or hire people to
help with their taxes.
Illegal scams can lead to significant penalties and interest
and possible criminal prosecution. IRS Criminal Investigation works closely
with the Department of Justice (DOJ) to shutdown scams and prosecute the
criminals behind them.
Abusive Tax Structures
Abusive tax schemes have evolved from simple structuring of
abusive domestic and foreign trust arrangements into sophisticated strategies
that take advantage of the financial secrecy laws of some foreign jurisdictions
and the availability of credit/debit cards issued from offshore financial
institutions.
IRS Criminal Investigation (CI) has developed a nationally
coordinated program to combat these abusive tax schemes. CI's primary focus is
on the identification and investigation of the tax scheme promoters as well as
those who play a substantial or integral role in facilitating, aiding, assisting,
or furthering the abusive tax scheme, such as accountants or lawyers. Just as
important is the investigation of investors who knowingly participate in
abusive tax schemes.
What is an abusive scheme? The Abusive Tax Schemes program
encompasses violations of the Internal Revenue Code (IRC) and related statutes
where multiple flow-through entities are used as an integral part of the
taxpayer's scheme to evade taxes. These schemes are characterized by the
use of Limited Liability Companies (LLCs), Limited Liability Partnerships
(LLPs), International Business Companies (IBCs), foreign financial accounts,
offshore credit/debit cards and other similar instruments. The schemes are
usually complex involving multi-layer transactions for the purpose of concealing
the true nature and ownership of the taxable income and/or assets.
Whether something is “too good to be true” is important to
consider before buying into any arrangements that promise to “eliminate” or
“substantially reduce” your tax liability. If an arrangement uses
unnecessary steps or a form that does not match its substance, then that
arrangement is an abusive scheme. Another thing to remember is that the
promoters of abusive tax schemes often employ financial instruments in their
schemes; however, the instruments are used for improper purposes including the
facilitation of tax evasion.
The IRS encourages taxpayers to report unlawful tax evasion.Find out howto report suspected tax fraud activity.
Misuse of Trusts
Trusts also commonly show up in abusive tax structures. They
are highlighted here because unscrupulous promoters continue to urge taxpayers
to transfer large amounts of assets into trusts. These assets include not only
cash and investments, but also successful on-going businesses. There are
legitimate uses of trusts in tax and estate planning, but the IRS commonly sees
highly questionable transactions. These transactions promise reduced taxable
income, inflated deductions for personal expenses, reduced (even to zero)
self-employment taxes, and reduced estate or gift transfer taxes.
These transactions commonly arise when taxpayers are
transferring wealth from one generation to another. Questionable trusts rarely
deliver the tax benefits promised and are used primarily as a means of avoiding
income tax liability and hiding assets from creditors, including the IRS.
IRS personnel continue to see an increase in the improper
use of private annuity trusts and foreign trusts to shift income and deduct
personal expenses, as well as to avoid estate transfer taxes. As with other
arrangements, taxpayers should seek the advice of a trusted professional before
entering a trust arrangement.
Captive Insurance
Another abuse involving a legitimate tax structure involves
certain small or “micro” captive insurance companies. Tax law allows businesses
to create “captive” insurance companies to enable those businesses to protect
against certain risks. The insured claims deductions under the tax code for
premiums paid for the insurance policies while the premiums end up with the
captive insurance company owned by same owners of the insured or family
members.
The captive insurance company, in turn, can elect under a
separate section of the tax code to be taxed only on the investment income from
the pool of premiums, excluding taxable income of up to $1.2 million per year
in net written premiums.
In the abusive structure, unscrupulous promoters persuade
closely held entities to participate in this scheme by assisting entities to
create captive insurance companies onshore or offshore, drafting organizational
documents and preparing initial filings to state insurance authorities and the
IRS. The promoters assist with creating and “selling” to the entities often
times poorly drafted “insurance” binders and policies to cover ordinary
business risks or esoteric, implausible risks for exorbitant “premiums,” while
maintaining their economical commercial coverage with traditional
insurers.
Total amounts of annual premiums often equal the amount of
deductions business entities need to reduce income for the year; or, for a
wealthy entity, total premiums amount to $1.2 million annually to take full
advantage of the Code provision. Underwriting and actuarial substantiation
for the insurance premiums paid are either missing or insufficient. The
promoters manage the entities’ captive insurance companies year after year for
hefty fees, assisting taxpayers unsophisticated in insurance to continue the
charade
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