Conservation easements, digital assets, and microcaptive insurance — these are just some of the schemes and scams the IRS covered Thursday, the last day of its annual Dirty Dozen campaign.

Started in 2002 by the IRS, the annual Dirty Dozen campaign lists 12 scams and schemes that put taxpayers, businesses, and the tax professional community at risk of losing money, personal information, data, and more.

The IRS highlighted two topics Thursday: bogus tax-avoidance strategies and schemes with an international element.

Bogus tax-avoidance strategies

  • In abusive syndicated conservation easement arrangements, promoters push transactions that purport to allow investors to claim charitable contribution deductions that significantly exceed the amount invested. These arrangements generate high fees for promoters and “attempt to game the tax system with grossly inflated tax deductions,” the IRS said.
  • Abusive small captive or microcaptive insurance companies lack many of the attributes of legitimate insurance, the IRS said. Hallmarks of abusive microcaptives include “implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages.” The IRS also noted that these arrangements often feature excessive premiums that do not reflect arm’s-length pricing.

Schemes involving international elements

  • One abusive arrangement the IRS highlighted involves U.S. citizens or residents who contribute to foreign individual retirement arrangements in Malta or another country. The IRS notes that “these countries allow for contributions in a form other than cash and do not limit the amount of contributions by reference to employment or self-employment activities.” U.S. taxpayers are improperly claiming exemption from U.S. income tax on gains and earnings in, and distributions from, these foreign individual retirement arrangements by asserting they are a “pension fund” for U.S. tax treaty purposes. (For more on these arrangements, see Roberts, “IRS Targets Malta Pension Plans: Compliance Options,” 54-12 The Tax Adviser 28 (December 2023).)
  • The IRS warns that promoters often claim that digital assets are untraceable and undiscoverable. However, the Service says it can identify and track anonymous transactions of digital assets around the globe. For federal tax purposes, digital assets are treated as property.

Also making the Dirty Dozen list:

Phishing and smishing scams

The IRS opened its 2024 Dirty Dozen list with a warning about evolving phishing and smishing scams designed to steal sensitive information. Fraudsters and identity thieves use these scams to trick recipients into clicking a suspicious link, filling out personal and financial information, or downloading malware onto their computer. The Dirty Dozen has included phishing since at least 2010, while smishing first appeared on the 2023 list.

Abuse of the employee retention credit

The employee retention credit (ERC) was designed for businesses that paid their employees even if operations were suspended because of a government order during the COVID-19 pandemic or their gross receipts declined during limited eligibility periods. The IRS has blamed unscrupulous promoters for luring businesses into filing questionable claims. In September 2023, it initiated a moratorium on processing new claims. It also has offered a voluntary disclosure program — now suspended — for businesses that want to repay ERC money they should not have received. Businesses that filed ERC claims that have not received ERC money can still withdraw their claims.

Online account scammers

Some scammers offer their services to create a taxpayer’s online IRS account, giving them access to personal tax and financial information that they can use to steal someone’s identity. For example, the information lets the scammers submit fraudulent tax returns in a victim’s name to get a refund.

Taxpayers can and should establish their own online account, the IRS said.

Improper fuel tax credit claims

The fuel tax credit is not available for most taxpayers because it applies only to off-highway business and farming use. But unscrupulous promoters or return preparers mislead taxpayers about fuel use and create fictitious documents or receipts for fuel, the IRS said, adding that it has seen an increased number of fictitious claims for fuel tax credits being filed on Form 4136, Credit for Federal Tax Paid on Fuels. Promoters get their money by charging inflated fees, while taxpayers are left with all the risk and responsibility that go with a bad claim.

Offer-in-compromise mills

Offer-in-compromise (OIC) mills promise to settle taxpayer debt at steep discounts even though many taxpayers may not meet the technical requirements for the program. These mills can charge excessive fees for information that taxpayers can obtain for free by using the IRS’s Offer In Compromise Pre-Qualifier tool.

While some companies offer legitimate services, the IRS encouraged people to assess public information about eligibility criteria for the OIC program before they pay for outside help.

Fake charities

Scammers often use fake charities to obtain money from donors during tragedies such as natural disasters. They also gather personal and financial information that they can use for tax-related identity fraud.

Unscrupulous tax preparers

Unscrupulous tax preparers, including “ghost preparers,” encourage people to file false tax returns and steal valuable personal information, the IRS said. Ghost preparers get their name because they disappear after encouraging taxpayers to take advantage of tax credits and benefits for which they do not qualify, charging a large fee, and/or stealing the entire refund.

Social media advice

People posting on social media can post “wildly inaccurate tax advice,” the IRS said, as it warned against looking to TikTok or similar outlets for help with their tax returns.

Spearfishing

Spearfishing involves cybercriminals who impersonate real taxpayers seeking help from tax professionals. They use fake emails to get sensitive data or gain access to a tax professional’s client information from their computer system.

Phishing refers to emails or text messages designed to steal personal information directly or by clicking on an embedded link or attachment. Spearphishing, however, targets specific individuals, organizations, or businesses, typically using malicious emails.

Traps for high-income taxpayers

Wealthy taxpayers can fall for tax traps pushed by dishonest promoters and shady tax practitioners, including these three: inflated art donation deductions, aggressive charitable remainder annuity trusts (CRATs), and detailed shelters that maneuver to delay gains on property.

With improper art donation deductions, promoters encourage taxpayers to buy art that they promise is worth significantly more than the purchase price. Promoters may suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount. Promoters may even arrange for certain charities to take the donations.

CRATs are irrevocable trusts that let people donate assets to charity and draw annual income for life or for a specific time period. But these trusts are sometimes misused to eliminate capital gain.

In the third trap, promoters look for taxpayers seeking to defer the recognition of gain upon the sale of appreciated property. In these schemes, an intermediary purchases appreciated property in exchange for an installment note. These notes typically provide for interest payments only, with the principal to be paid at the end of the term. The seller gets the proceeds and, the IRS says, improperly delays gain recognition until the final payment on the installment note.