The IRS is warning wealthy taxpayers of illegal tax strategies pushed by scammers and dishonest promoters. High earners are told these strategies will reduce their taxable income, but following through with the schemes could land taxpayers in big tax trouble.
The illegal tax strategies could “leave victims with civil or criminal tax penalties,” said IRS Commissioner Danny Werfel said in a release about the scams.
Given IRS efforts to increase tax enforcement with a focus on high earners, the risk of setting off audit red flags and facing civil or criminal penalties could be higher for the wealthy this year.
Here’s more of what you should know.
‘Tax strategies’ for high earners
Abusive promoters may promise to lower taxable income with strategies that seem “too good to be true.” Some schemes deceive high earners into unknowingly inflating charitable donations or eliminating capital gains tax using illegal strategies. But these ‘tax strategies’ could cost high earners money rather than helping them save. Here are some common schemes, according to the IRS.
Misuse of a trust to avoid capital gain: Dishonest promoters might encourage high earners to wrongly claim appreciated assets transferred to a charitable remainder annuity trust (CRAT).
- This increases the cost basis, so when taxpayers sell the asset, there is no realized gain. The profit from the sale is then used to purchase a single premium immediate annuity (SPIA).
- Filers only report a small portion of the annuity as income.
Using monetized installment sales to delay gains: For this scheme, abusive promoters sell taxpayers monetized installment sales through abusive tax shelters. This delays the payment of the principal and the realized gain, sometimes for several years.
Inflating charitable deductions for art: The art donation tax scam isn’t new. As Kiplinger reported last year, promoters urge wealthy filers to purchase art at seemingly discounted rates and delay donations until the art has significantly increased in value. However, the art’s market value is misrepresented, which can cause filers to overpay and claim incorrect deduction amounts.
Legal tax strategies for high-income filers
There are several legal tax strategies high earners can utilize to lower their tax liability, including claiming proper charitable deductions, and as Kiplinger has reported, ways to avoid capital gains tax. Taxpayers shouldn’t feel the need to steer clear of deductions they are legitimately elgible for. However, wealthy filers should be cautious of whose advice to trust.
The IRS reminds high earners that “relying on an independent tax or legal professional can help avoid problems with aggressive promoters.”
IRS crackdown for high earners
The IRS’ increased efforts to restore fairness to the tax system include targeting millionaire tax evaders and wealthy tax cheats, so high-income taxpayers are on the agency’s radar now more than ever. Claiming charitable deductions and failing to report all taxable income, which are focuses of the abusive tax schemes, can increase the risk of an audit.
Additionally, the IRS’ use of AI can now help identify certain patterns and trends when selecting returns for audit, making it more likely for the agency to catch tax cheats. And you don’t need to be a millionaire to catch the IRS’ attention. If you make $400,000 or more per year, the agency considers you a high earner.
