Yesterday the Internal Revenue Service’s Large Business and International Division announced that it was adding six more compliance campaigns to its previously-announced list of 29 such campaigns. The compliance campaigns signify LB&I’s move toward “issue-based examinations” premised upon pre-selected issues that present the greatest risk of non-compliance. According to LB&I, the stated goal of this effort is to “improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.”

In January 2017, LB&I unveiled its first 13 campaigns to be implemented as part of its effort to move toward issue-based examinations of taxpayers based upon risk assessments. In November 2017, LB&I announced the identification and selection of 11 additional compliance campaigns. At the time, LB&I stated that more campaigns would continue to be identified, approved, and launched in the coming months. On March 13, 2018, LB&I announced the addition of five more issues to the growing list of compliance campaigns.

In yesterday’s announcement, LB&I stated that is currently reviewing the tax reform legislation signed into law on December 22, 2017, “to determine which existing campaigns, if any, could be impacted as a result of a change in the controlling statutory framework.” LB&I further stated that “[i]nformation regarding any identified impact will be communicated after that analysis has been completed.”

According to LB&I, the six new campaigns were identified through data analysis and suggestions from IRS employees.  The six campaigns selected for this rollout, and a description of each, are as follows:

Interest Capitalization for Self-Constructed Assets

When a taxpayer engages in certain production activities they are required to capitalize interest expense under Internal Revenue Code (IRC) Section 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of designated property. Designated property under IRC Section 263A(f) is defined as (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The goal of this campaign is to ensure taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. The treatment stream for this campaign is issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance

Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties

This campaign will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. The Service will address noncompliance through a variety of treatment streams including, but not limited to, examinations and penalties assessed by the campus when the forms are received late or are incomplete.

Forms 1042/1042-S Compliance

Taxpayers who make payments of certain U.S.-source income to foreign persons must comply with the related withholding, deposit, and reporting requirements. This campaign addresses Withholding Agents who make such payments but do not meet all their compliance duties. The Internal Revenue Service will address noncompliance and errors through a variety of treatment streams, including examination.

Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by U.S. payors to improperly claim treaty benefits and exempt U.S. source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

Nonresident Alien Schedule A and Other Deductions

This campaign is intended to increase compliance in the proper deduction of eligible expenses by nonresident alien (NRA) individuals on Form 1040NR Schedule A. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new Internal Revenue Code provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

NRA Tax Credits

This campaign is intended to increase compliance in nonresident alien individual (NRA) tax credits. NRAs who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents may erroneously claim certain dependent related tax credits. In addition, some NRA taxpayers may also claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

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Attorneys representing cannabis businesses are often faced with questions about what happens when the cannabis business has not paid its taxes and the IRS is proceeding with collection actions.  No one thinks the IRS will seize and sell cannabis to satisfy tax liabilities, because in doing so the IRS would engage in criminal violations of the Controlled Substances Act.  However, recently, IRS Chief Counsel issued advice addressing questions posed by the field about whether an IRS sale of equipment used in a cannabis business would result in a violation of criminal laws.

In CCA 2018042616201420, Chief Counsel determined that Gas Chromatographer Mass Spectrometers (GCMS) and Liquid Chromatographer Mass Spectrometers (LCMS) used by taxpayers involved in the marijuana industry to measure the amount of cannabinoids in marijuana were not drug paraphernalia under the Drug Paraphernalia Statute, 21 U.S.C. § 863.  The conclusion was that because the equipment, which is used to measure organize material, can be used for purposes other than measuring cannabinoids, such as in fire investigations, explosive investigations, and even the identification of foreign material collected from outer space, the equipment was not drug paraphernalia.

The CCA also concluded that the existence of marijuana residue on the equipment did not prohibit the sale because, pursuant to 21 U.S.C. § 841(a), the existence of a residual amount of a controlled substance did not create the intent to distribute a controlled substance.

The CCA advised that the equipment should be subject to a “deep cleaning” prior to sale not only to avoid any possibility of a criminal violation but also to maximize the value of the equipment at auction.    The cost of this cleaning should be considered by Collections when determining collection potential of the property.

In Wendell Falls Development, LLC v. Commissioner, T.C. Memo. 2018-45, the Tax Court denied a charitable contribution deduction for a taxpayer’s contribution of a conservation easement because the taxpayer expected to receive a substantial benefit from the donation.

The taxpayer purchased 27 contiguous parcels of unimproved land, comprising 1,280 acres. The taxpayer planned to subdivide the 1,280 acres into a master-planned community with residential areas, commercial spaces, an elementary school, and a park. The taxpayer would then sell the lots to builders.

The taxpayer identified 125 acres of the 1,280 acres as land upon which a park would be placed. The taxpayer and the County discussed the County acquiring the 125 acres for use as a county park. The taxpayer sought to ensure that the 125 acres would be restricted to park use and proposed placing a conservation easement on the 125 acres. Ultimately, the taxpayer and the County entered into a purchase agreement for the 125 acres, and placing a conservation easement on the land was a precondition to the sale. The taxpayer granted a conservation easement on the 125 acres in favor of a land trust and transferred ownership of the 125 acres to the County. The taxpayer claimed a charitable deduction for its contribution of the conservation easement on its tax return.

The issue here is the “substantial benefits” test. No deduction for a charitable contribution is allowed if the taxpayer expects a substantial benefit from the contribution. The taxpayer owned and intended to sell the 1,280 acres of land adjoining the 125 acres that was designated as park land. The taxpayer’s master-planned community was designed so that all residential areas would have access to the 125-acre park.  According to the Court, the taxpayer expected a substantial benefit from the donation because it sought to ensure that the 125 acres was restricted to park use, and as the prospective seller of the lots the taxpayer “would benefit from the increased value to the lots from the park as an amenity.” Because the taxpayer expected a substantial benefit from the donation, the Court disallowed the charitable deduction. (Note: alternatively, the Court determined that the value of the easement was zero because the park land did not diminish the value of the 125 acres).

Recently, the written supervisory approval requirement of Section 6751(b) has been one of the primary issues in Tax Court litigation concerning penalties that the IRS has asserted against taxpayers. The focus of this litigation is the effect of Section 6751(b) and its interplay with the Commissioner’s burden of production as to penalties in court proceedings under Section 7491(c). In Dynamo Holdings v. Commissioner, 150 T.C. No. 10 (May 7, 2018), the Tax Court addressed these issues in a partnership-level proceeding.

Section 6751(b)(1) provides that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination…” (note that Section 6751(b)(2) provides certain exceptions to this general rule).

Section 7491(c) provides that the IRS “shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.”

Until the Chai and Graev III opinions, there had been little litigation over the effect of Section 6751(b).

In Chai v. Commissioner, 851 F.3d 190 (2nd Cir. 2017), the taxpayer argued in his post-trial brief that compliance with the written-approval requirement in Section 6751(b)(1) is an element of the Commissioner’s claim for penalties and is therefore part of the Commissioner’s burden of production under Section 7491(c). The Second Circuit Court of Appeals agreed, holding that Section 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty. Chai held that Section 6751(b) is part of the Commissioner’s burden or production in a deficiency case in which a penalty is asserted.

In Graev v. Commissioner (Graev III), 149 T.C. No. 23 (Dec. 20, 2017), the Tax Court held that the Commissioner’s burden of production under Section 7491(c) includes establishing compliance with the written supervisory approval requirement of Section 6751(b). Thus, in a deficiency case in which a penalty is asserted, it is the IRS’s burden to introduce sufficient evidence establishing compliance with the supervisor approval requirement.

In Dynamo Holdings, the Tax Court addressed the interplay between the supervisor approval requirement and the IRS’s burden of production in a partnership-level proceeding. The Court held that the IRS does not bear the burden of production with respect to penalties under Section 7491(c) in a partnership-level proceeding. The Court reasoned that Section 7491(c) provides that the IRS has the burden of production “with respect to the liability of any individual for any penalty…” Because partnership-level proceedings do not determine liabilities and are not with respect to individuals, the IRS does not bear the burden of production as to penalties. In a similar vein, the IRS does not bear the burden of production with respect to penalties asserted against corporations.

The Court further held that where the IRS does not bear the burden of production as to penalties, the lack of supervisory approval of penalties may be raised as a defense to those penalties. However, taxpayers should note that they must affirmatively argue that the IRS failed to comply with the supervisory approval requirements of Section 6751. Failure to make such an argument can be costly, as the taxpayer will be deemed to have waived the defense.

On May 30, the newly-formed Philadelphia Chapter of the Federal Bar Association’s Section on Taxation will host a meet-and-greet event with the Honorable Mark V. Holmes of the United States Tax Court. The event is free and open to all tax practitioners in the greater Philadelphia area. To RSVP for this event, please email events@foxrothschild.com.

Judge Holmes was appointed to the Tax Court by President George W. Bush in 2003, and was recently re-appointed for a second fifteen-year term. Judge Holmes is a prolific jurist known for delightfully colorful opinions that bring to life often dreary tax concepts. In recent years, he has authored numerous opinions addressing cutting edge tax issues, including his decision last year in Avrahami, the first judicial opinion to tackle the validity of micro-captive insurance arrangements. Judge Holmes also presided over the lengthy trial involving a dispute between the Internal Revenue Service and the estate of pop star Michael Jackson, and practitioners are eagerly awaiting his decision in this closely-watched case. In recent months, Judge Holmes has authored multiple opinions addressing the fallout from the Chai and Graev decisions, which held that IRS supervisory approval is required before penalties may be asserted, including decisions involving the aforementioned Jackson estate as well as pro football Hall of Famer Warren Sapp. In another case that is generating significant interest, Judge Holmes is set to rule on the application of Internal Revenue Code section 280E to a marijuana business in Patients Mutual Assistance Collective Corporation.

Established in February 2018, the Philadelphia Chapter is the newest chapter of the Federal Bar Association Section on Taxation. The Philadelphia Chapter is co-chaired by Matthew D. Lee of Fox Rothschild and Kevin M. Johnson of Baker Hostetler.

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The State of Minnesota has joined the growing list of states that are criminally prosecuting business owners for using “zapper” programs to commit tax evasion.  Yesterday the Minnesota Department of Revenue and the St. Louis County Attorney’s Office announced the convictions of a Duluth restaurant and its owners for tax crimes based upon their use of sales suppression software.  This represents the first time that Minnesota has criminally prosecuted anyone for using a zapper.

Commonly called “zappers,” sales suppression software programs run on a point-of-sale computer or cash register and are used to secretly delete some or all of a restaurant’s cash transactions and then reconcile the books of the business. The result is that the company’s books appear to be complete and accurate, but are in fact false because they reflect fewer sales than were actually made. Business owners using zapper programs often maintain two sets of books, in order track the business’ real revenue. A recent article published by BNA estimates that tax-zapping software costs states $21 billion in taxes annually and that 30 percent of the electronic cash registers, or point-of-sale systems, in the United States have a zapper installed.

The restaurant in question, Osaka Sushi Hibachi & Steak House, is owned by Dan Xu and Zhong Wei Lin.  Dan Xu pleaded guilty to one felony count of aiding in the filing of false tax returns.  Zhong Wei Lin pleaded guilty to one felony count of failing to pay sales tax.  The court stayed prison sentences for both individuals in lieu of the immediate payment of restitution in full and a year of probation.  The restaurant itself pleaded guilty to two felony counts of aiding in the filing of false tax returns and fifteen felony counts of failing to pay sales tax.  The court ordered the corporation to pay restitution as well.  All three defendants paid restitution in the total amount of $292,760.

During their plea hearing, Xu and Lin admitted to intentionally using “zapper” computer software in the point of sale system at their restaurant.  The software, which was called “Happy World,” was contained on a thumb drive that was discovered by investigators during a search of the restaurant.  The Happy World software automatically created a second set of books that removed line items from cash transactions after the fact, allowing the business to underreport its monthly sales and avoid paying sales tax collected from customers.

“These are first-of-their-kind convictions in Minnesota and highlight our investigators’ efforts to combat the growing use of sales suppression software,” said Revenue Commissioner Cynthia Bauerly.  “These convictions demonstrate our determination to level the playing field so that businesses who report and pay their fair share of tax don’t have to compete with those who break the law.”

“Deliberately failing to turn over sales taxes collected increases the tax burden on all residents.   We hope this case sends a message to others engaging in this kind of behavior that it will not be tolerated, and you will be prosecuted when caught,” said St. Louis County Attorney Mark Rubin.

As we have previously reported, state revenue departments and attorneys general (and not the Internal Revenue Service) are leading the effort to combat the use of zappers.  More than half of the states have now enacted laws criminalizing the use of sales suppression devices, and in the last two years, authorities in Washington, Michigan, Illinois, and Connecticut have successfully prosecuted criminal cases against businesses and their owners – primarily in the restaurant industry.  The Minnesota case is yet another example of aggressive action undertaken recently by state authorities against zappers, and should serve as a stern warning to business owners using (or considering using) such technology.

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United States v. Gerard, a recent case from the Northern District of Indiana, demonstrates how a tax lien, once attached, can stay with property even after the property is conveyed to someone other than the taxpayer.  In 1990, a husband and wife named Robert and Cynthia Gerard bought a residence as tenants by the entirety.  Although the Gerards bought the residence together, Robert paid at least 90% of the purchase price.  Between 2003 and 2008, Cynthia owned a business with outstanding employment and unemployment taxes.  The Gerards and the government generally agreed that the assessments for these tax liabilities attached to Cynthia’s interest in the property.  As time went on, Robert and Cynthia decided to convey the property solely to Robert.  The deed stated that the conveyance was “by way of gift and without any consideration other than for love and affection.”

The government, however, still wished to enforce the liens.  Litigation ensued, and the government moved for summary judgment.  The key issue was whether the liens that were attached to Cynthia’s interest in the property survived the severance of the tenancy by the entirety.  Section 6323 provides that a lien is not valid against a purchaser until the IRS files proper notice.  Thus, according to the court, Robert would not be liable for Cynthia’s outstanding tax balance if Robert was a “purchaser.”  A “purchaser” is “[a] person who, for adequate and full consideration in money or monies worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against a subsequent purchaser without actual notice.”  IRC § 6323(h)(6).  “Adequate and full consideration in money or money’s worth” is “a consideration in money or money’s worth having a reasonable relationship to the true value of the interest in property acquired.”  Treas. Reg. § 301.6323(h)-1(f)(3).

The Gerards argued that Robert was a purchaser because Cynthia used marital assets to pay her business’s expenses and then transferred her interest in the property in repayment of those debts.  The government, however, pointed out that the deed specifically stated that the transfer was made “by way of gift and without any consideration other than for love and affection,” and that any consideration would have been past consideration, which was insufficient.

The court was not concerned that the deed stated that the property was a gift.  It noted that “[i]t is a well-known fact that often a conveyance recites a nominal consideration whereas the true consideration is not nominal.  It is therefore never certain that the recited consideration is the true consideration.”  Clark v. CSX Transp., Inc., 737 N.E.2d 752, 759 (Ind. Ct. App. 2000).  The court was, however, concerned with the fact that the parties agreed that the use of marital assets to pay Cynthia’s business expenses was “past consideration.”  Under the regulations, “adequate and full consideration” includes past consideration only if, “under local law, past consideration is sufficient to support an agreement giving rise to a security interest. . .”  Treas. Reg. § 301.6323(h)-1(a)(3); (f)(3).  Accordingly, the court turned to Indiana law to determine whether past consideration could create a security interest.

The Gerards could not cite any Indiana authority indicating that past consideration gives rise to a security interest.  Also, other federal courts hold that past consideration does not make a party a “purchaser” under section 6323(a).  See, e.g., United States v. Register, 727 F. Supp. 2d 517, 526 (E.D. Va. 2010).  Thus, the court concluded that Robert was not a purchaser under section 6323(a) and that the liens attached to Cynthia’s interest in the property survived the conveyance.

The parties still disputed the extent to which the liens attached to the property.  The government argued that the liens remained attached to a one-half interest in the property.  The Gerards, however, argued that Cynthia’s actual interest was worth less than one-half of the property when it was conveyed, so the liens only attached to something less than a one-half interest.  Here again, the court found that Indiana law did not support the Gerards’ argument.  For example, in Radabaugh v. Radabaugh, the court held that the trial court erred by “conclud[ing] that appellee was the owner of less than an undivided one-half interest in the mortgage loan” for real estate owned by a husband and wife as tenant by the entirety.  35 N.E.2d 114, 115-16 (Ind. Ct. App. 1941).  Thus, the court concluded that the liens were still attached to one-half of Robert’s interest in the property, even after the conveyance.

 

Breaking from its recent practice of making public announcements about Geographic Targeting Orders, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) last month quietly extended its real estate GTOs for another six months. The new expiration date is September 16, 2018. FinCEN’s move to continue the GTOs a fourth time suggests that the orders are generating meaningful intelligence for law enforcement regarding potential money laundering involving luxury real estate in the United States.

In January 2016, FinCEN announced with significant fanfare the initial issuance of the real estate GTOs, proclaiming in a press release that “FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami.” Those initial orders required certain title insurance companies to identify the natural persons behind companies used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County. All-cash transactions exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, were to be reported to FinCEN with an identification of the “beneficial owner” behind the transaction.

On the eve of the expiration of the original Manhattan and Miami-Dade GTOs in August 2016, FinCEN announced a significant expansion of their scope with the issuance of additional GTOs covering the following geographic areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each geographic area varied.

In February 2017, FinCEN announced that its efforts to combat money laundering in the luxury real estate market were being extended for an additional six months. At that time, then-FinCEN Acting Director Jamal El-Hindi said that the real estate GTOs were “producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector.” FinCEN also revealed that approximately 30 percent of the transactions covered by the GTOs involved a beneficial owner or purchaser representative that is also the subject of a previously-filed “suspicious activity report,” thereby corroborating FinCEN’s long-expressed concerns about the use of shell companies to buy luxury real estate in all-cash deals.

Six months later, in August 2017, FinCEN announced the issuance of revised GTOs that require U.S. title insurance companies to identify the natural persons behind shell companies used to pay for high-end residential real estate in seven metropolitan areas. Following the recent enactment of the Countering America’s Adversaries through Sanctions Act, FinCEN revised the GTOs to capture a broader range of transactions and include transactions involving wire transfers. FinCEN also expanded the GTOs to include transactions conducted in the City and County of Honolulu, Hawaii. In addition, FinCEN published an Advisory to provide financial institutions and the real estate industry with information on the money laundering risks associated with real estate transactions, including those involving luxury property purchased through shell companies, particularly when conducted without traditional financing. Such transactions are vulnerable to abuse by criminals seeking to launder illegal proceeds and mask their identities. The Advisory provided information on how to detect and report these transactions to FinCEN.

The latest iteration of the real estate GTOs was set to expire on March 20, 2018. Without issuance of a press release and nary a public statement, FinCEN quietly extended those orders for another six month period, through September 16, 2018. A Miami Herald article reporting on this development included the following quote from a FinCEN spokesman:

“The GTOs issued to date have provided FinCEN and law enforcement important information about money-laundering vulnerabilities in the real estate sector,” Stephen Hudak, a FinCEN spokesman, wrote in an email Wednesday. “GTOs are a valuable tool and FinCEN is extending the current GTOs to continue studying this vulnerability.”

With this fourth extension, the real estate GTOs – which by statute are supposed to be temporary measures – have now been in effect for more than two full years. Although FinCEN has made only a few public statements about whether the GTOs are generating meaningful intelligence and leads, it can be safely assumed that they are working. It remains to be seen whether these enhanced (and temporary) reporting requirements imposed by the real estate GTOs will be made permanent through passage of legislation or regulations.

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The Internal Revenue Service announced today that it is providing taxpayers an additional day to file their tax returns following a computer problem that arose early in the morning on April 17, the tax filing deadline. Taxpayers will now have until midnight on Wednesday, April 18, to file their returns. No action is necessary in order for taxpayers to receive the benefit of an extra day.

“This is the busiest tax day of the year, and the IRS apologizes for the inconvenience this system issue caused for taxpayers,” said Acting IRS Commissioner David Kautter. “The IRS appreciates everyone’s patience during this period. The extra time will help taxpayers affected by this situation.”

A Washington Post article reported that “several senior government officials, speaking on the condition of anonymity, said the agency’s outdated technology failed amid the crush of last-minute filers.” The IRS has faced years of budget cuts from Congress, with its workforce steadily dwindling and its technology systems in dire need of upgrades.

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Tomorrow is the annual deadline for the filing of individual income tax returns for calendar year 2017.  The Internal Revenue Service expects to receive approximately 32 million returns in the final days leading up to April 17.  In addition, the IRS expects to receive about 12 million last-minute requests for extensions of the April 17 filing deadline.  With millions of taxpayers scrambling to meet tomorrow’s deadline, we provide this recap of the IRS’s annual list of the “Dirty Dozen” tax scams for 2018 and a link to our prior blog posts addressing each one.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS highlighted each of these scams on twelve consecutive days leading up to the filing deadline to help raise awareness.

1. “Phishing” scams: These schemes typically take the form of fake emails or websites looking to steal personal tax information and often increase in frequency during tax season.

2. Phone scams where criminals pose as IRS agents: In aggressive phone scams, criminals pose as IRS agents in hopes of stealing money. During filing season, the IRS generally sees a surge in scam phone calls threatening such things as arrest, deportation, and/or license revocation if the victim does not pay a phony tax bill. In a new variation, the IRS has observed that identity thieves are filing fraudulent tax returns with refunds going into the real taxpayer’s bank account, followed shortly thereafter by a threatening phone call trying to convince the taxpayer to send the money to the fraudster.

3. Identity theft: Even though instances of tax-related identity theft have declined markedly in recent years, the IRS warns that this practice is still widespread and remains serious enough to earn a spot on its annual list of tax scams. Tax-related identity theft occurs when someone uses a stolen Social Security number or Individual Taxpayer Identification Number (ITIN) to file a fraudulent tax return claiming a refund.

4. Tax return preparer fraud: With more than half of the nation’s taxpayers relying on someone else to prepare their tax return, the IRS reminds consumers today to be on the lookout for unscrupulous tax preparers looking to make a fast buck from honest people seeking tax assistance. The IRS recognizes that the majority of tax professionals provide honest, high-quality service. But there are some dishonest preparers who operate each filing season to perpetrate refund fraud, identity theft, and other scams that hurt honest taxpayers.

5. Fake charities: Scam groups masquerade as charitable organizations, luring people to make donations to groups or causes that don’t actually qualify for a tax deduction.

6. Falsely inflated refunds:  Scam artists frequently prey on older Americans, low-income taxpayers, and others with promises of big refunds.

7.  Improper claims for business credits:  Two common credits targeted for abuse include the research credit and the fuel tax credit. While both credits have legitimate uses, there are specific criteria that must be met in order to qualify for them.

8.  Falsely padding deductions:  Common areas targeted by unscrupulous tax preparers involve overstating deductions such as charitable contributions, padding business expenses, or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.

9.  Falsified income and fake Form 1099 scams:   A common tax scam the IRS sees each year involves falsifying income in order to claim refundable credits, such as the Earned Income Tax Credit. Another frequent scheme involves the filing of false Forms 1099 and/or bogus financial instruments such as bonds, bonded promissory notes, or worthless checks.

10.  Frivolous tax arguments:  Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. Such arguments have been repeatedly thrown out of court.

11.  Abusive tax shelters:  These sophisticated schemes, particularly those involving micro-captive insurance shelters, are peddled by promoters and others to avoid taxes.

12.  Offshore tax evasion: Offshore tax compliance has been a major focus for the IRS in recent years, and taxpayers who avoid taxes by hiding money or assets in unreported offshore accounts should remain wary given the continuing focus on such schemes by both the IRS and the Justice Department.

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