Every year, the IRS compiles its “Dirty Dozen” list of the worst tax scams. Although these scams usually intensify during tax filing season, taxpayers may encounter them at any time. And although tax fraud can nab anyone, certain schemes target those with higher net worth because they have more to take.

5 scams

Be on the lookout for the following threats: 

Fake Charities
Scammers masquerading as charitable organizations often take advantage of philanthropically inclined individuals who wish to help victims of natural disasters and other tragic events. Fake charities not only steal money intended for legitimate victims, but also gather sensitive personal and financial information about donors to commit tax identity theft. Often, criminals choose names that sound similar to well-known charities and use email or manipulated caller IDs to trick people into making donations.

The IRS advises donors to be wary of pressure tactics, such as time limits. In addition:

• Be suspicious of charities that request gift card numbers or wire transfers;
• Pay by credit card or check;
• Never share your Social Security number or other personal or financial information that is not necessary; and
• Always take the time to vet charitable organizations with the IRS’s Tax-Exempt Organization Search (TEOS) tool.

Only contributions to legitimate, tax-exempt charities qualify for an income tax deduction.

Inflated Art Donation Deductions
Beware unscrupulous promoters who promise big deductions for overvalued art. These promoters may encourage you to buy art, often at a “discounted” price, promising that the art is worth significantly more than the purchase price. They may also offer services such as storage, shipping and arranging for appraisal and donation (possibly to a fake charity). Typically, these fraudsters encourage their targets to wait at least a year to donate the art and then claim a tax deduction for the inflated fair market value.

Many art donation deductions are legitimate. However, you should be wary of aggressive marketing and promotions and watch out for inflated values or questionable appraisals. The IRS employs a team of professionally trained art appraisers prepared to assess the true value of donated art and flag anything that seems improperly valued.

Syndicated Conservation Easements
A conservation easement is an agreement, usually with a government agency or land trust, to permanently restrict the use of real property. If an easement achieves certain conservation goals — such as protecting natural resources, maintaining the land’s scenic or recreational qualities, or preserving historic structures — and meets certain other requirements, the owner generally is entitled to claim a charitable tax deduction based on the easement’s value.

The IRS has warned taxpayers of abusive arrangements that could result in audits, penalties and litigation. For example, beware of promoters who, in exchange for high fees, syndicate conservation easement transactions that supposedly allow you to claim charitable contribution deductions that are high in relation to the property’s overall value.

Offshore Schemes
There are some legitimate reasons to house assets outside the United States. However, immoral promoters may attempt to lure you into placing assets in offshore accounts and structures with the promise that they are beyond the IRS’s reach. But the IRS has the ability to identify and track anonymous transactions involving foreign financial accounts. If you run afoul of the Foreign Account Tax Compliance Act (FATCA), it could result in serious legal trouble.

Digital Asset Investments
Bad actors may recommend investments in cryptocurrency and nonfungible tokens (NFTs), claiming that such purchases are untraceable and undiscoverable. However, the IRS is hot on their trail. The tax agency says it can find anonymous transactions of digital assets anywhere in the world.

If it seems too good to be true

These are just a few examples of the many tax scams that can ensnare unwitting taxpayers. To protect yourself, work with reputable, trusted tax and investment professionals and always remember that if a tax strategy seems too good to be true, it probably is.

Related Read: IRS Clarifies Theft and Fraud Loss Deductions

Sidebar:   When a “friend” is actually a foe

It is natural for people to trust those who share their ethnicity, religion, workplace, neighborhood, social clubs and other connections. Affinity fraud exploits these commonalities. Perpetrators of such schemes are (or pose as) members of the group they are attempting to defraud.

They may employ Ponzi or pyramid schemes, in which they use money from new investors to pay earlier investors to create the illusion of a successful investment. They also, of course, typically keep a portion of the money themselves. When new investments dry up, such scams generally collapse, leaving later investors with financial losses.

To help avoid becoming a victim of affinity fraud:

• Research every investment offer, including the promotor’s background. Know that the person making the pitch could be an innocent front for a criminal.
• Never invest solely on the recommendation of someone you know, no matter how well you know the person.
• Do not fall for investments that promise no risk, spectacular profits or “guaranteed” returns.
• Be wary of any transaction that is not put in writing, particularly if you are told to keep the deal confidential.

For more information, contact Alex Isdell at 312.670.7444 or [email protected]. Visit ORBA.com to learn more about our Wealth Management Services. Sign up here to receive our blogs, newsletters and Client Alerts.