Optima Tax Relief Lists Some of the IRS “Dirty Dozen” 2022 Tax Scams

The IRS has warned taxpayers of possible tax scams to be avoided in 2022, including: 

• Maltese pension arrangements misusing treaty 
• Puerto Rican captive insurance  
• Monetized installment sales 

Optima Tax Relief explains what each of these scams is and the tax implications of using them. The IRS recently released its annual "Dirty Dozen" list of tax scams, and there are some new additions this year. As in previous years, the list includes scams that target taxpayers in various ways, including phishing emails, phone calls, and text messages.

Maltese Pension Arrangements Misusing Treaty

Some taxpayers have attempted to avoid paying taxes by making contributions to foreign retirement accounts in Malta and other countries that allow non-cash contributions or do not limit the number of contributions. This becomes an issue when taxpayers improperly claim the foreign arrangement to be a pension fund for U.S. tax treatment purposes. This then allows them to claim an exemption from income tax earned on the account, as well as the distributions from the account. 

The Maltese pension arrangements are a clear abuse of the treaty system and need to be reformed. The current system allows wealthy individuals to funnel their money into Maltese pension schemes, which are then used to invest in foreign real estate and other assets. 

This benefits the individual by allowing them to shelter their money from taxation, but it does nothing to help the people of Malta. The government needs to close this loophole and put an end to this abusive practice. Only then will the Maltese pension system be able to function as intended, and the people of Malta will finally be able to benefit from it.

Puerto Rican Captive Insurance

In this transaction, a U.S.-based taxpayer claims deductions for the cost of insurance. The problem is this insurance is provided by a fronting carrier that reinsures the coverage with a foreign corporation. The fronting carrier essentially rents out its license to the taxpayer as they assume no actual risk.  

Monetized Installment Sales

In monetized installment sales, a seller will agree to sell appreciated property to a buyer for cash. The seller then claims to sell the same property to a third party in return for an installment note. Then the third party claims to sell the property to the buyer and receives the cash purchase price. The issue is the seller receives an amount very close to the sales price without paying transactional fees, all in a nonrecourse and unsecured loan. 

The IRS is strongly urging any taxpayer who has engaged in the above transactions to file an amended return and even seek tax advice. Not doing so can result in penalties and even fraud charges.  

This year, however, the list also includes scams that specifically target small businesses and self-employed individuals. One such scam is the "ghost preparer" scam, in which a tax return preparer promises a large refund without ever seeing the taxpayer's financial information. Another common scam is the "phishing" scam, in which taxpayers receive fake emails or text messages that appear to be from the IRS requesting personal information. The best way to avoid these scams is to be aware of them and to use caution when providing personal information to anyone claiming to be from the IRS. If you have any doubts about the communication you've received, you can always call the IRS directly to verify its legitimacy.