New Tax Scams Target Art and Charitable Donation Deductions

The IRS recently warned taxpayers of three new tax schemes that are currently being used by dishonest promoters and unscrupulous tax companies. Read on to learn more about these schemes and how to protect yourself come tax season.

Improper Art Donation Deductions 

More and more taxpayers have become targets of schemes that distort tax laws to allegedly reduce taxes. One popular form of the scam takes the form of improper art donation deductions. While there are methods for taxpayers to properly claim deductions for such donations, many promoters promise values to pieces of art that are fraudulently high. Basically, these individuals encourage taxpayers to buy artwork at a discounted rate (that sometimes covers additional services offered by the promoter, such as storage, shipping, and appraisal). The promoter then promises that the art purchased is worth significantly more, encouraging taxpayers to wait a year, donate the art, and then claim a tax deduction that is far more than the fair market value. Such tactics can leave taxpayers in the lurch come tax time, saddled with penalties and fines for attempting to make a fraudulent deduction based on a questionable appraisal or inflated value.

Charitable Remainder Annuity Trusts 

Another new tax scheme involves charitable remainder trusts (CRATs), which are a type of irrevocable trust that allows taxpayers to donate certain assets to charity and then draw annual income. Unfortunately, some tax promoters convince taxpayers to misuse these trusts to eliminate capital gains on a property by transferring the appreciated property to the trust and then claiming the transfer, which gives the assets a step-up to fair market value (as though they had been sold to a trust). The CRAT then sells the asset, but doesn’t report the gain due to the stepped-up basis and uses the proceeds to purchase a single premium immediate annuity (SPIA). Later, the beneficiary will report only a small portion of the annuity from the SPIA as income, treating the remainder as an excluded return of investment (for which no tax is due). Such maneuverings are the result of a misapplication of the IRS’ rules and can result in significant penalties.

Monetized Installment Sales 

The final tax scheme mentioned by the IRS involves monetized installment sales. During these deals, promoters look for taxpayers who are attempting to defer capital gains upon the sale of property and then organize an abusive shelter by selling them monetized installment sales. The latter occurs when an intermediary buys property from a seller in exchange for an installment note, which allows taxpayers to pay interest only and wait until the end of the term to pay the principal. With these arrangements, the person making the sale receives most of the proceeds and improperly delays the recognition of capital gains on the property until the final payment on the note, which could be years later.

Were You the Victim of Tax Fraud? 

If you were the victim of a fraud-based tax scheme, you should report the incident to IRS investigators. Still, those who find themselves taken advantage of by these kinds of scams could still end up on the hook for financial penalties. In these cases, it is important to work with an experienced tax lawyer who is well-versed in these unscrupulous practices. Call CPA, former FBI Special Agent, and Florida tax attorney Ronald Cutler. P.A. today to learn more.

Sources 

irs.gov/newsroom/dirty-dozen-high-income-filers-vulnerable-to-illegal-tax-schemes-face-risk-from-improper-art-donation-deductions-charitable-remainder-annuity-trusts-monetized-installment-sales

irs.gov/dmaf/form/14242