Beware of Tax Schemes: A Guide For High-Net-Worth Individuals
As financial advisors, our priority is to safeguard your wealth and ensure compliance with tax regulations. Recently, the IRS has issued warnings targeting high-net-worth individuals about elaborate schemes designed to exploit tax loopholes. It’s essential to stay informed and cautious to protect your assets and avoid significant legal and tax penalty repercussions.
IRS Warning on Elaborate Tax Schemes
Unfortunately, high-net-worth individuals are prime targets for complex tax avoidance schemes. These schemes often promise substantial tax savings but can lead to severe consequences. The IRS is actively cracking down on these tactics, emphasizing the importance of adhering to legitimate tax strategies.
According to the IRS, some common schemes include:
- Conservation Easements: Overvalued land donations to obtain inflated charitable deductions.
- Micro-Captive Insurance Arrangements: Small insurance companies set up to insure risks with little or no real insurance coverage, primarily to reduce taxable income.
- Offshore Accounts and Structures: Concealing income or assets in offshore accounts and through foreign trusts to evade taxes.
Illegal Tax Schemes and Improper Deductions[i]
Next, the IRS warns wealthy individuals about tax traps designed by shady tax practitioners. If the tax strategy sounds too good to be true, it probably is. Clients should be wary of tax preparers promoting schemes and aggressive strategies to reduce taxes, running the gamut from “inflated art donation deductions” to aggressive charitable remainder annuity trusts and detailed shelters that maneuver to delay paying gains on property.
While the art of estate planning often involves carefully designed tax-saving strategies within the letter of the law, IRS Commissioner Danny Werfel warns high-net-worth individuals of solicitations for unrealistic tax structures that can leave taxpayers with civil or criminal tax penalties.
One such practice is encouraging taxpayers to purchase art, often at a “discounted” price. The promoter may offer additional services, such as storage, shipping, and arranging the appraisal and donation of the art. The unscrupulous promoter promises the art is worth significantly more than the purchase price.
The scheme encourages the purchaser to donate the art after waiting at least one year and to claim a tax deduction for an inflated fair market value, which is substantially more than they paid for the artwork. The IRS warns that it’s equipped with art appraisers who can determine the true valuation and to be wary of promoters who “suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount” or even arrange for certain charities to take the donations.
The IRS also warns of practitioners who misuse trusts, such as charitable remainder trusts, to eliminate capital gains and those who recommend schemes such as deferring the recognition of gain on the sale of appreciated property and then organizing an abusive shelter through selling them monetized installment sales.
The 2023 IRS Dirty Dozen List
Annually, the IRS publishes what is known as the "Dirty Dozen" list, highlighting prevalent scams and schemes that taxpayers should avoid. The 2023 list underscores ongoing threats, reminding both taxpayers and tax professionals to remain vigilant year-round, not just during tax season.
Key schemes from the 2023 Dirty Dozen include:
- Phishing and Smishing Scams: Fraudulent emails and text messages impersonating the IRS, aimed at stealing personal information.
- Fraudulent Tax Preparers: Unscrupulous tax preparers who commit fraud or make false claims on behalf of clients.
- Spear-Phishing Attacks: Targeted phishing campaigns against tax professionals to gain access to client data.
- Inflated Refund Claims: Promoters who promise inflated tax refunds through false deductions and credits.
- Bogus Charities: Fake charities that solicit donations but fail to meet legal requirements.
Staying Safe: Best Practices
Here are some steps you can take to protect yourself:
- Verify the Legitimacy: Always verify the credentials of tax preparers and the legitimacy of any tax-saving scheme.
- Stay Informed: Keep abreast of IRS announcements and warnings.
- Consult Professionals: Work with trusted financial advisors and tax professionals who prioritize compliance and ethical practices.
- Be Skeptical: Be wary of promises of significant tax savings that sound too good to be true.
Navigating the complexities of tax compliance is crucial for safeguarding your wealth. By staying informed about the latest IRS warnings and the "Dirty Dozen" list, you can avoid falling victim to elaborate tax schemes. As always, we are here to provide guidance and ensure your financial strategies are both effective and compliant.
Are you new to Northstar Financial Planning? For more information or to discuss your tax planning strategies, feel free to schedule a Get Acquainted Meeting with us. We are a team of women-led financial advisors in Windham, New Hampshire who specialize in helping women and their families face life’s most difficult financial transitions with confidence. We can’t wait to meet you and learn about your unique situation.
