Key Takeaways
- Selling the tax fairy to high-earners.
- The consequences of not filing.
- Why you should pay what you can.
- Investigation highlights how tax law punishes scam victims.
- FCC goes after "tax relief" robocaller.
- International tax corner.
- Too good to be legal.
- Cheese Fondue Day, 8 Track Day;
High-income filers vulnerable to illegal tax schemes; face risk from improper art donation deductions, charitable remainder annuity trusts, monetized installment sales - IRS. Today's installment of the annual IRS Dirty Dozen campaign features scams targeted at higher-income filers. One of these is the art contribution scam:
These promoters encourage taxpayers to buy various types of art, often at a "discounted" price. This price may also include additional services from the promoter, such as storage, shipping and arranging the appraisal and donation of the art. The promotor promises the art is worth significantly more than the purchase price.
These schemes are designed to encourage purchasers to donate the art after waiting at least one year and to claim a tax deduction for an inflated fair market value, which is substantially more than they paid for the artwork. Promoters may suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount. Promoters may even arrange for certain charities to take the donations.
If it were worth "significantly more than the purchase price," the purchase price would be significantly more.
What Happens if You Don’t File Your Taxes by April 15 - Ashlea Ebeling, Wall Street Journal:
The failure-to-file penalty is stiff and adds up quickly. For individual taxpayers, the IRS typically assesses a failure-to-file penalty at 5% of the unpaid taxes for each month or partial month, capped at 25% of the total.
Even if you owe taxes and can’t pay, file a tax return. Or you’ll owe more. - Michelle Singletary, Washington Post:
...
“Some people think it’s better to wait to file until they have the money,” Smith said. “Bad idea. Much better to file on time, pay as much as you can with your return and request a payment agreement for the rest.”
You can learn more about IRS payment plans here.
What to know before the tax deadline - Aris Folley and Taylor Giorno, The Hill. "Beware of tax scams proliferating across cyberspace. Some of these are perpetrated by outright fraudsters in the form of bogus text messages and emails while others occupy a gray area of shady advertising and self-interested business advice."
Got kids? Here's what to know about filing your 2023 taxes - Katherine Roth, Associated Press via ABC News. "The child tax credit has reverted lower for 2023 than in previous years, when it was expanded due to COVID. This means taxpayers with one or two children may see a lower credit for their children under age 17 than in 2021. It’s still up to $2,000 per child, though, and it can be claimed alongside the standard deduction and reduces your total tax bill, said Eric Bronnenkant, director of tax at Betterment, a financial advisory company that provides digital investment, retirement and cash management services."
Scams are always in season
Senate investigation shows scam victims being taxed on their stolen funds - Michael Laris, Washington Post:
The taxes came due in his case because the IRS taxes distributions from pretax retirement accounts, even though Larry never got to spend the money because it was in the hands of the scammers. He eventually had to tap what was left of his savings and borrow from his brother to cover the tax bill.
Getting Congress to not tax people on their theft losses would be nice, but it's better to not be a theft victim in the first place. Nobody from the IRS, or Social Security, or a state tax agency will call you out of the blue and demand money or immediate action because "your account has been breached." These IRS anti-scammer tips are good for any call from a purported government agent:
-Leave pre-recorded, urgent, or threatening messages on an answering system.
-Threaten to immediately bring in local police or other law enforcement groups to arrest the taxpayer for not paying, deport them or revoke their licenses.
-Call to demand immediate payment with a prepaid debit card, gift card or wire transfer.
-Ask for checks to third parties.
-Demand payment without giving the taxpayer an opportunity to question or appeal the amount owed.
Criminals can fake or spoof caller ID numbers to appear to be anywhere in the country. Scammers can even spoof an IRS office phone number or the numbers of various local, state, federal or tribal government agencies.
If a taxpayer receives an IRS or Treasury-related phone call, but doesn't owe taxes and has no reason to think they do, they should:
-Not give out any information. Hang up immediately.
-Contact the Treasury Inspector General for Tax Administration to report the IRS impersonation scam call.
-Report the caller ID and callback number to the IRS by sending it to phishing@irs.gov. The subject line should include "IRS Phone Scam."-
This from Homeland Security is also good advice: "Be suspicious of unsolicited phone calls, visits, or email messages from individuals asking about employees or other internal information. If an unknown individual claims to be from a legitimate organization, try to verify his or her identity directly with the company."
Congressional delay season
House Panel Leaders Says Tax Bill Delay Hurts Small Biz - Asha Glover, Law360 Tax Authority ($):
The Senate should pass the Tax Relief for American Families and Workers Act of 2024 and extend key provisions of the 2017 Tax Cuts and Jobs Act including the immediate expensing of research and development costs, Small Business Committee Chairman Roger Williams said during a committee hearing on high taxes.
Senate Democrats Say They Won’t Give Up on Tax Package - Doug Sword, Tax Notes. "The Senate’s top taxwriter pledged to continue to fight for a $79 billion tax package at a rally with parents who are in Washington this week to voice their support for an expanded, more refundable child tax credit."
Blogs and bits
FCC takes action against tax debt robocall - Kay Bell, Don't Mess With Taxes:
...
The robocalling campaign, which offered to "rapidly clear" the call recipients' tax debts, increased in volume in the three months immediately preceding the start of the 2024 tax filing season.
Bozo Tax Tip #2: Withhold, but Don’t Remit, Your Employment Taxes! - Russ Fox, Taxable Talk:
The above strategy is likely one of two quick and easy ways to get on the road to ClubFed. The IRS doesn’t like it when trust fund taxes don’t make it to the government. The penalties are substantial. The liability goes to the owners (and check signers) of the business. IRS Criminal Investigation will investigate this. Don’t do this!
As Russ notes, the employees will claim tax refunds based on the unremitted withholding. The IRS will notice.
IRS Issues Proposed Regulations On The New Company Stock Buyback Tax - Kelly Phillips Erb, Forbes ($): "There are many reasons why companies might be interested in a buyback. One is corporate consolidation—since stock shares represent ownership of the company, the more shares that are spread about, the less control shareholders might have over the company's future. Buybacks can help keep control of the company in the hands of a few. Stock buybacks can also help preserve or boost stock prices. And, since selling stock is generally viewed as a way to raise much-needed capital, buying it back can signal to investors that the company is financially healthy (even if it's not)."
Speaking of the Taxgirl - Kelly Phillips Erb is interviewed in Tax Notes today (paywalled, unfortunately). As a tax blogger, I enjoyed this from Kelly:
Amen, sister.
International Tax Corner
Testing the TCJA - Alex Parker, Things of Caesar. "But what about something totally new, with technology that is essentially disconnected from those other products? When that comes along, whatever it is, it will be a major test for the TCJA as well as other recent new tax reforms. Will companies still use aggressive arrangements to shift the profits from that tech offshore, or will its intangibles be, in a sense, trapped in the jurisdiction where they were made?"
Related: Eide Bailly International Tax Services
U.S. Servicemembers Overseas: Don’t Miss the IRS’s “Marching Orders” Regarding Filing Your Tax Returns - Erin Collins, NTA Blog. "As a servicemember stationed abroad, some payments and benefits you receive from the government are not taxable. These include combat pay, the housing and cost-of-living allowances abroad paid by the U.S. government or by a foreign government, the Overseas Housing Allowance, moving allowances, veterans’ education benefits, and travel allowances, including leave between consecutive overseas tours, among others. Other tax benefits that you may be able to claim include but are not limited to the Earned Income Tax Credit, education credits, the Child Tax Credit, and the Child and Dependent Care Credit. Note that you can count your combat pay as income when calculating the Earned Income Tax Credit, which could increase your credit even though combat pay is not taxable."
President Biden Would Make the US a Tax Rate Outlier - Adam Michel, Liberty Taxed. "President Joe Biden proposes raising the corporate income tax rate, capital gains tax rate, and personal income tax rates, among other tax increases. These hikes would make the United States an international outlier, with some of the highest tax rates in the developed world."
Too good to be legal
Florida Attorney Sentenced to 8 years in Prison in Fraudulent Charitable Contribution Tax Scheme - U.S. Department of Justice (Defendant names omitted, emphasis added):
According to court documents and statements made in court, from at least 2013 through 2021, Defendant, of Davie, Florida, used his skills as an attorney and certified public accountant to promote his fraudulent tax shelter called “The Ultimate Tax Plan.” Defendant and his co-conspirators... marketed the scheme as a way for high-income clients to reduce their taxes by claiming deductions for charitable donations that Defendant knew were fraudulent. Defendant prepared boilerplate transaction paperwork for his clients that made it appear they had donated valuable property to charities Defendant controlled. In fact, the clients retained complete control and use over the donated assets. Defendant wrongfully advised clients they could legally access their donated assets for their own personal use through tax-free loans and execute an “exit strategy” to buy back their donations at a significantly discounted rate. In some instances, Defendant backdated documents so that clients could claim purported donations on their prior years’ tax returns.
Over the years, Defendant ignored a chorus of people who advised him that his plan was illegal, including the IRS. Indeed, the IRS conducted several audits of Defendant’s charities, and found that the Ultimate Tax Plan was an economic sham. Defendant signed documents acknowledging that finding, and agreeing to close the bogus charities. However, Defendant simply created new “charities” and continued to promote his illegal shelter to wealthy taxpayers.
I suspect the chorus included the actual tax advisors to people who were being sold the scam. A lot of them must have ignored the chorus:
It sounds like it was fun while it lasted, anyway.
This case ties in well to today's IRS "Dirty Dozen" warning to high income taxpayers. Many "ultimate" customers now facing big tax bills and penalties are likely wishing they had listened to the chorus that was singing the "there is no tax fairy" song.
What day is it?
Go back a few decades with National Cheese Fondue Day and National Eight Track Day.
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