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An Overview of IRS Dirty Dozen Lists and Other Audit Triggers

tax form with callculator and glasses

The top twelve frauds or possibly abusive transactions that could result in an audit were listed in the IRS’s 2022 Dirty Dozen earlier this year. This list is not exhaustive nor a ranking of top priorities. Instead, it’s an effort by the IRS to warn taxpayers about possibly dishonest tax reporting methods or con games played by third parties.

Employing qualified and experienced Tax services in Aventura, FL, will help taxpayers avoid the common pitfalls highlighted below.

Trusts with charitable remainders (CRATs)

Those who used CRATS to evade taxes in the past have come under intense IRS scrutiny. Property that has been appreciated will be transferred by taxpayers to a CRAT. Then, as if the property were sold, the taxpayers file a step-up in basis claim. A single-premium instant annuity is bought using the proceeds from the property sale by the CRAT, which does not record a gain as a result of the step-up. A little amount of the annuity paid from the SPIA is all that the beneficiary declares as income. The recipient interprets the remainder of the payment as an excluded amount that represents a return on investment for which no tax is owed as a result of incorrectly interpreting the law pertaining to CRATs.

Treaty Pension Benefits

Taxpayers contribute to a foreign retirement plan with lax contribution guidelines that have no local link. The taxpayer claims an exemption on the profits and payouts of the “pension” by incorrectly claiming the foreign arrangement is a “pension fund” for the purposes of the U.S. tax treaty. The IRS cautions that these earnings ought to be subject to taxation and vows to strictly enforce this.

Installment sales with money

In an installment sale, the taxpayer sells a property to a third party in exchange for a note through a series of connected transactions. A buyer then purchases the property from the middleman for cash. The middleman gives the seller a non-recourse loan in exchange for the money. The IRS views this as a typical transaction and does not permit gain deferral.

Abuse-Promoting Syndicated Conservation Easements (SCEs)

Unreliable SCE promoters frequently mix partnership agreements without a valid business purpose with exorbitant assessments of undeveloped land or other real estate to provide taxpayers false charity contributions. SCEs would very well be at the top of this list of the “dirty dozen” if they were arranged according to the IRS’s priority order.