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IRS has a shortlist of common tax deduction scams

by | Aug 3, 2021 | Criminal/Civil Tax Litigation, Federal And State Tax Collections |

The Internal Revenue Service does a lot more than collect taxes and issues returns. One of its more helpful services is the annual “Dirty Dozen” list of tax scams. Amidst the twelve common scams is a shorter list of schemes that persuade taxpayers to engage in unscrupulous actions in hopes of large deductions. These “deals” are marketed by unscrupulous entities who charge large amounts of money for helping taxpayers claim illegal deductions. In cases like these, taxpayers may end up crossing their fingers, hoping that the IRS does not audit them. Notable entries on the tax deduction shortlist are:

  • Syndicated conservation easements: The scammers use inflated appraisals of undeveloped land and businesses devoid of legitimate business purposes. This leads to unwarranted tax deductions.
  • Abusive micro-captive arrangements: Scammers convince owners of closely-held businesses to engage in schemes that lack most of the attributes of proper insurance. So, the implausible may be covered, but genuine concerns that it should protect against are not. The premiums for the coverage are often excessive, and the policy likely does not follow tax law.
  • Improper claims of business credits: The involves the failure to engage, invest or substantiate qualified research activities related to the claimed research expense. Taxpayers must accurately document their research activities.
  • Improperly monetized installment sales: Scammers find taxpayers looking to defer recognition of a gain by selling the victim on the idea of a monetized installment plan. They buy the appreciated property from the seller, promising to pay in installments, which involves the interest on the principal over many years.

These aren’t the only scams

Other themes on the dirty dozen list are pandemic-related scams, personal information cons, and ruses that focus on unsuspecting victims. It is important to remember that anyone selling a too-good-to-be-true plan for avoiding taxes is likely a scammer. Rather than cheating the IRS, taxpayers can legally dispute the amount owed to the federal or state government. They then can possibly negotiate an equitable solution that doesn’t involve illegal claims.