IRS 2023 Dirty Dozen – Scam #10 (Part A)

IRS 2023 Dirty Dozen – Scam #10:   The Internal Revenue Service cautioned taxpayers to resist questionable tax practitioners and independent promoters selling schemes aimed at wealthy taxpayers. (Part A)

As part of the IRS annual Dirty Dozen, these potentially abusive arrangements involve things like Charitable Remainder Annuity Trusts and monetized installment sales. These tools can be misused by promoters, who can advertise these schemes to attract clients. The promoters misapply the rules and leave the filers vulnerable.”  “The IRS remains concerned about abusive tax arrangements, and they remain a focal point for our enforcement efforts,” said IRS Commissioner Danny Werfel. 

Schemes aimed at high-income filers – Charitable Remainder Annuity Trust (CRAT)

Charitable Remainder Trusts are irrevocable trusts that let individuals donate assets to charity and draw annual income for life or for a specific time period. The IRS examines charitable remainder trusts to ensure they correctly report trust income and distributions to beneficiaries, file required tax documents and follow applicable laws and rules. A charitable remainder annuity trust (CRAT) pays a specific dollar amount each year.

Unfortunately, these trusts are sometimes misused by promoters, advisors and taxpayers to try to eliminate ordinary income and/or capital gain on the sale of property. In abusive transactions of this type, property with a fair market value in excess of its basis is transferred to a CRAT. Taxpayers may wrongly claim the transfer of the property to the CRAT results in an increase in basis to fair market value as if the property had been sold to the trust. The CRAT then sells the property but does not recognize gain due to the claimed step-up in basis. Next, the CRAT purchases a single premium immediate annuity (SPIA) with the proceeds from the sale of the property.

By misapplying the rules under sections 72 and 664, the taxpayer, or beneficiary, treats the remaining payment as an excluded portion representing a return of investment for which no tax is due.

The IRS reminds taxpayers that they are legally responsible for what is on their tax return, not the practitioner or promoter who entices them to sign on to an abusive transaction.

Next week  #10:  Schemes Aimed at High-Income Filers (Part B)

(IRS Web Site)  (TTT 1010/23 & 10/17/23)