The latest IRS "Dirty Dozen" list of the most tax scams includes tactics that use phony federal Employee Retention Credit claims, fake texts and emails, bogus tax “help” and other illegal methods criminals use to take advantage of taxpayers. Advisors warn, however, that wealthy taxpayers are the most frequent targets of this type of fraud—if not willing participants.
“I’ve met people who use the Dirty Dozen [list] as suggestions for investments. They were serious!” said Larry Pon, a CPA and advisor in Redwood City, Calif. “It is so hard to convince clients not to do these deals.”
But whether they're duped or willing participants, wealthy taxpayers are usually the ones most commonly involved in these scams, advisors say.
“The difference between tax scams for the rich versus the average taxpayer is that the [scams targeting the] former tend to be more sophisticated and elaborate by posing as secret tax savings for the super-rich,” said Miklos Ringbauer, CPA and founder of MiklosCPA in Los Angeles.
Cons against the wealthy make the annual IRS Dirty Dozen list year after year—leaving advisors to wonder why high-net-worth clients keep falling for the same schemes.
“Lack of education is my best guess as to why folks continue to fall for scams that have been widely publicized,” said Bruce Primeau, a CPA and financial planning consultant with Avantax in Prior Lake, Minn. “Scam artists know to play to their weaknesses.”
Great wealth is not a replacement for caution and due diligence when it comes to avoiding a scam, one advisor notes.
“Many wealthy taxpayers have a very high risk tolerance, and it’s not always easy for laymen to distinguish between good tax advisors and biased tax advisors,” said Bill Smith, national director of tax technical services at CBIZ MHM’s national tax office in Washington, D.C.
The U.S. Federal Trade Commission warned as part of its annual Consumer Protection Week education campaign recently that scammers prey on unconscious fears—such as, for some wealthy, the fear of being left out of a sure moneymaker.
Wealthy clients who get involved in a shady tax scheme also stand a greater chance of getting caught these days, as the IRS has geared up audting of the rich.
But advisors also note that not all wealthy taxpayers are looking to steer clear of illegal tax avoidance schemes.
“Don’t underestimate the mindset of [some] wealthy when it comes to taking risks for the opportunity to make money off Uncle Sam,” Smith said. “These are not all innocent victims of huskers. Many are husker co-conspirators ... sophisticated entrepreneurs and business people involved in complex transactions as part of their daily lives.”
“Where we see these scam issues are mainly with prospective clients who call about a dubious tax scheme,” Ringbauer added. “When they don’t hear what they’re looking for, they get frustrated and generally don’t become our clients.”
Of the latest Dirty Dozen, according to the IRS, three scams focus on the wealthy: tricks with charitable remainder trusts and charitable donations; inflating fair market value of art donations for a bogus, large tax deduction; and abusive capital gains shelters using monetized installment sales.
“But within those three, there can be more,” Smith said, adding that some bogus tax-saving strategies focus on syndicated conservation easements and micro-captive insurance companies.
The IRS says among the more popular vehicles for scams are charitable remainder trusts, which are irrevocable trusts that let individuals donate assets to charity and draw annual income for life or for a specific period. Charitable remainder annuity trusts (CRATs) pays a dollar amount each year. The IRS says that promoters can use such trusts to eliminate ordinary income or capital gain on the sale of property.
Assets donated to any type of CRAT “have to be sold in an arm’s-length transaction to get that step up and, clearly, donation or sale to a CRAT that directly benefits the donor is not legitimate,” Primeau said. “My guess is the person perpetrating this scam is the one selling the annuity and is capturing a sizable commission for doing so.”
Improper art donation deductions, another tactic that made it to the Dirty Dozen list. Promoters of this scheme use direct solicitation to encourage rich taxpayers to buy various art at discount and then donate it after a year for a “substantially” inflated fair market tax deduction that’s more than they paid for the artwork, the IRS says.
“My guess is the perpetrator is the person assisting others with the sale of artwork,” Primeau said. “He or she gets a commission on the sale, helping a client get rid of unwanted artwork, and packages it as a great tax savings—once again preying on the unknowing purchaser’s desire to save a boatload of taxes and likely disappearing long before that taxpayer is audited.”