The Internal Revenue Service (IRS) has warned US taxpayers to beware of promoters peddling “bogus tax schemes aimed at reducing taxes or avoiding them altogether”.
This was part of its 2023 Dirty Dozen campaign to crackdown on tax avoidance.
The IRS said that schemes can take many shapes, ranging from “abusive deals involving syndicated conservation easements and micro-captive insurance arrangements”, and they can also involve an international component, such as “hiding cash and digital assets offshore or using Maltese foreign individual retirement accounts or foreign captive insurance”.
Danny Werfel, IRS commissioner said: “These tax avoidance strategies often target high-income individuals seeking to reduce or eliminate their tax obligation.
“Sometimes taxpayers are conned into believing they can participate in these schemes. People should always look for advice from an independent, trusted tax professional, not a promoter focused on aggressively marketing and pushing questionable transactions.”
Malta
The annual Dirty Dozen campaign – a list of 12 scams and schemes – featured Malta-based individual retirement arrangements “misusing treaty”, the IRS said.
The US taxman said that the arrangements involve US citizens or residents attempting to avoid US tax by “contributing to foreign individual retirement arrangements in Malta, or potentially other host countries”.
The IRS added: “Participants in these transactions typically lack any local connection to the host country, and unlike US law for individual retirement arrangements, the host country’s laws 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.
“By improperly asserting the foreign arrangement as a ‘pension fund’ for US tax treaty purposes, the US taxpayer misconstrues the relevant treaty provisions and improperly claims an exemption from US income tax on gains and earnings in, and distributions from, the foreign individual retirement arrangement.”
Offshore accounts and digital assets
During the Dirty Dozen list, the IRS said that “international tax compliance remains a high priority” for the US taxman.
The US taxman said it is scrutinising taxpayers attempting to hide assets in offshore accounts and accounts holding digital assets, such as cryptocurrency.
The IRS said: The IRS reminds US persons that they are taxable on their worldwide income, unless they can establish there is a statutory or treaty exemption.
“The IRS continues to identify individuals who attempt to conceal income in offshore banks, brokerage accounts, digital asset accounts and nominee entities. The IRS scrutinises structured transactions, private annuities, employee leasing schemes, foreign trusts, the use of nominee ownership and other arrangements used to conceal taxable income, beneficial owners and assets.
“To complement its enforcement investigations, the IRS requires individuals holding foreign assets and third parties to report to the IRS on foreign assets, foreign accounts, foreign entities and digital assets. Reporting requirements carry penalties for failure to file.
“Asset protection professionals and unscrupulous promoters continue to lure US persons into placing their assets in offshore accounts and structures, saying they are out of reach of the IRS. Similarly, unscrupulous promoters recommend digital assets as being untraceable and undiscoverable by the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts as well as digital assets.
“Many of these schemes are promoted and advertised online, but all these schemes have one thing in common – they promise tax savings that are too good to be true and will likely cause legal harm to taxpayers.”
