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Tax Avoidance Strategies Targeted by the IRS

Annually the Internal Revenue Service publishes something called the “Dirty Dozen”. Effectively it’s a list of tax avoidance strategies that the Service is currently targeting with substantial amounts of resources and additional legal wherewithal in the tax court system.

The list changes annually as the IRS targets new threats inside the tax code. This year’s additions didn’t include many surprises.

I’ve written about many of these in the past, but here are a few that should be highlighted and remembered.

Hidden Offshore Accounts and Digital Assets

I’ll remind everyone that our country taxes all income including income from sources outside the continental US and her territories. Income must be reported with any taxes paid in foreign countries being credited against any tax which may be due and/or oweing.

Many tax cheats are employing newer and more sophisticated tax avoidance strategies including foreign trusts, employee leasing to establish a Puerto Rico tax home, private annuities, and transactions involving nominee entities structured to conceal the true ownership of assets. Consequently foreign tax compliance remains a top priority of the Service.

Crypto Assets are another continuing issue. The Service now has the ability to determine the true owner of these assets and is bringing those offenders to justice on an international scale.

High Income Non-Filers

Persons earning more than $100K annually who don’t file a return are a consistent target of the IRS. Given the fact that the Service gets copies of your W-2’s, K-1’s, and 1099’s, people who make this mistake are ridiculously easy to catch. 

This is a continuing favorite given the fact that upper-income taxpayers actually have the ability to pay liabilities when assessed. Most of the time when they audit poorer taxpayers, they never get paid. Think about it. How much blood can you get from a turnip?

Abusive Syndicated Conservation Easements

The Service has continued its on-going campaign to identify and deny the benefit of these easements that attempt to defraud the tax code using syndicated conservation entities. I wrote about these earlier this year. Unless you want to end up in an expensive process where you’re charged interest, penalties, and additional legal fees to stay out of the slammer, these should be avoided at all possible costs.

Abusive Insurance Arrangements

Another tax avoidance strategy uses the life insurance laws to hide assets inside private life insurance policies fraudulently avoiding estate taxes. These are a continuing target of on-going IRS enforcement actions.

Let me leave you with this.

Strategies like these are primarily promoted by larger law, insurance, and investment firms. Why? Because when the Service comes in to do its job of denying these fraudulent transactions, the firm that sold it to you can then charge ridiculous amounts of money to keep you out of prison.

Don’t be fooled by anyone making these sorts of promises. If it sounds too good to be true, it probably is.

The people at the Service who prosecute these criminals aren’t your usual, run-of-the-mill revenue officers. These people are sharp and not to be messed with. 

Once they get in the middle of these audits, they get forensic in their approach, knowing their time will be more than compensated. If you don’t think you can be caught, think again.

There’s always an electronic footprint. No matter where your accounts may or may not be, under whatever names, don’t ever think that any bank or investment manager will be willing to lose their jobs or their ability to breathe free air in order to protect your secrets. No matter who they are or whatever promises they may have made, they’ll provide whatever information the Service requests without hesitation.

Also, don’t make the mistake of thinking that you’re smarter than the enforcement people at the IRS. There isn’t anything you can think of that they aren’t already prosecuting.

The last part of the equation of protecting you is who you have doing your accounting work and signing your return. The main reason they require us to sign returns with the EIN of our company and our unique Preparer Tax Identification Number is so that they can properly police the preparers.

Please realize that one of the biggest factors in whether or not your return gets audited is the person who signs it.

What happens when the Service audits a return where they determine that the preparer aided in the perpetuation of a fraud? They audit another five of the preparers’ returns that are similar to the first. If they find that the preparer did the same fraudulent things on those returns, they’ll open all of the preparer’s returns to be audited. If you made the mistake of hiring that preparer, now you’re getting audited as well.

This is the main enforcement activity used against preparers and the way that the Service polices the system. Don’t kid yourselves my Brothers and Sisters, having the wrong person sign your return will get you audited every time.

If this has happened to you or you need help in any way, don’t hesitate to contact us. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,

*Words from our exceptional leadership