The IRS' 2023 Dirty Dozen List targets 3 schemes with International Elements

1 .Offshore Accounts & Digital Assets

International tax compliance remains a high priority for the IRS. The IRS continues to scrutinize taxpayers attempting to hide assets in offshore accounts and accounts holding digital assets, such as cryptocurrency. The IRS reminds U.S. 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 scrutinizes 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 U.S. 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.

2. Maltese Individual Retirement Arrangements Misusing Treaty

These arrangements involve U.S. citizens or residents who attempt to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta (or potentially other host countries). The participants in these transactions typically lack any local connection to the host country, and unlike U.S. 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 c
ontributions by reference to employment or self-employment activities. By improperly asserting the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty provisions and improperly claims an exemption from U.S. income tax on gains and earnings in, and distributions from, the foreign individual retirement arrangement.

3. Puerto Rican and Other Foreign Captive Insurance

In these transactions, U.S. business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner (or a related entity) claims a deduction for amounts paid as premiums for “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack many of the attributes of legitimate insurance. Like the micro-captives described above, the characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered (or duplicative coverage of risks already covered by commercial insurance), excessive premiums indicative of non-arm’s length pricing and a lack of business purpose for entering the arrangement.

Where appropriate, the IRS will challenge the purported tax benefits from these types of transactions and impose penalties. The IRS Criminal Investigation Division is always on the lookout for promoters and participants of these types of schemes. Taxpayers should think twice before including questionable arrangements like this on their tax returns. After all, taxpayers are legally responsible for what's on their return, not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know and trust.

The IRS warns anyone thinking about using one of these schemes – or similar ones – that the agency continues to improve investigation and enforcement in these areas by utilizing new and evolving data analytic tools and enhanced document matching.

Whether anchored offshore or in the U.S., abusive transactions and schemes remain a high priority for the IRS.

The IRS Office Of Chief Counsel Continues To Hire Additional Attorneys To Help The Agency Combat Abusive

Arrangements, Including Syndicated Conservation Easements, Micro-Captive Transactions And Others.

The IRS also created the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPI) to coordinate service-wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effectuate tax evasion.

Tax advisory