The IRS is warning wealthy taxpayers of illegal tax strategies pushed by scammers and dishonest promoters. High earners are told these strategies will reduce their taxable income, but following through with the schemes could land taxpayers in big tax trouble.
The illegal tax strategies could “leave victims with civil or criminal tax penalties,” said IRS Commissioner Danny Werfel said in a release about the scams.
Given IRS efforts to increase tax enforcement with a focus on high earners, the risk of setting off audit red flags and facing civil or criminal penalties could be higher for the wealthy this year.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here’s more of what you should know.
‘Tax strategies’ for high earners
Abusive promoters may promise to lower taxable income with strategies that seem “too good to be true.” Some schemes deceive high earners into unknowingly inflating charitable donations or eliminating capital gains tax using illegal strategies. But these ‘tax strategies’ could cost high earners money rather than helping them save. Here are some common schemes, according to the IRS.
Misuse of a trust to avoid capital gain: Dishonest promoters might encourage high earners to wrongly claim appreciated assets transferred to a charitable remainder annuity trust (CRAT).
- This increases the cost basis, so when taxpayers sell the asset, there is no realized gain. The profit from the sale is then used to purchase a single premium immediate annuity (SPIA).
- Filers only report a small portion of the annuity as income.
Using monetized installment sales to delay gains: For this scheme, abusive promoters sell taxpayers monetized installment sales through abusive tax shelters. This delays the payment of the principal and the realized gain, sometimes for several years.
Inflating charitable deductions for art: The art donation tax scam isn’t new. As Kiplinger reported last year, promoters urge wealthy filers to purchase art at seemingly discounted rates and delay donations until the art has significantly increased in value. However, the art’s market value is misrepresented, which can cause filers to overpay and claim incorrect deduction amounts.
Legal tax strategies for high-income filers
There are several legal tax strategies high earners can utilize to lower their tax liability, including claiming proper charitable deductions, and as Kiplinger has reported, ways to avoid capital gains tax. Taxpayers shouldn’t feel the need to steer clear of deductions they are legitimately elgible for. However, wealthy filers should be cautious of whose advice to trust.
The IRS reminds high earners that “relying on an independent tax or legal professional can help avoid problems with aggressive promoters.”
IRS crackdown for high earners
The IRS’ increased efforts to restore fairness to the tax system include targeting millionaire tax evaders and wealthy tax cheats, so high-income taxpayers are on the agency’s radar now more than ever. Claiming charitable deductions and failing to report all taxable income, which are focuses of the abusive tax schemes, can increase the risk of an audit.
Additionally, the IRS’ use of AI can now help identify certain patterns and trends when selecting returns for audit, making it more likely for the agency to catch tax cheats. And you don’t need to be a millionaire to catch the IRS’ attention. If you make $400,000 or more per year, the agency considers you a high earner.
Related Content
-
Don’t Miss Apple and Walmart Back-to-School Tax-Free Holiday Savings this SummerSales Tax Select states host sales tax holidays during the summer. Here’s what you can purchase.
-
The Rule of Retirement InversionThe rule of retirement inversion says that to have a great retirement, you must ask yourself what would ruin a great retirement — and then plan to avoid it.
-
Five Ways Trump’s 2025 Tax Bill Could Boost Your Tax Refund (or Shrink It)Tax Refunds The tax code is changing again, and if you’re filing for 2025, Trump’s ‘big beautiful’ bill could mean a bigger refund next year, a smaller one, or something in between. Here are five ways the new law could impact your bottom line.
-
New SALT Deduction Could Put Thousands Back in California Homeowners’ PocketsTax Breaks The federal state and local sales tax (SALT) deduction cap is higher this year, and could translate into bigger savings for Golden State homeowners.
-
Money for Your Kids? Three Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's FinancesTax Tips The Trump tax bill could help your child with future education and homebuying costs. Here’s how.
-
Why Your Summer Budget Feels Tighter: Tariffs Push Up InflationTariffs Your summer holiday just got more expensive, and tariffs are partially to blame, economists say.
-
Alabama Tax-Free Weekend 2025Tax Holiday Here’s everything you need to know about the 2025 back-to-school Alabama sales tax holiday.
-
Key 2025 Tax Changes for Parents in Trump's MegabillTax Changes Are you a parent? The so-called ‘One Big Beautiful Bill’ (OBBB) impacts several key tax incentives that can affect your family this year and beyond.
-
‘I Play Pickleball in Retirement.’ Is It HSA-Eligible?Retirement Tax Staying active after you retire may be easier with these HSA expenses. But there’s a big catch.
-
Mississippi Tax-Free Weekend 2025Tax Holiday Just in time for Prime Day, Mississippi celebrated a tax holiday in July. Find out what back-to-school essentials were included.
