High Earners: Beware of These Illegal Schemes to Lower Taxes
The IRS says high-income filers are targets for several illegal tax schemes that promise tax benefits.
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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
-
Is Home Insurance Tax Deductible?With home insurance rates on the rise, you might be hoping to at least claim the cost as a tax deduction. Here's what you need to know ahead of tax season.
-
The December Jobs Report Is Out. Here's What It Means for the Next Fed MeetingThe December jobs report signaled a sluggish labor market, but it's not weak enough for the Fed to cut rates later this month.
-
Trump Signals Plan to Ban Institutional Investors From Buying Single-Family HomesThe president says the move could improve housing affordability. Here’s what the data shows about investor ownership, recent buying trends and what it could mean for homebuyers.
-
Are You Afraid of an IRS Audit? 8 Ways to Beat Tax Audit AnxietyTax Season Tax audit anxiety is like a wild beast. Here’s how you can help tame it.
-
States That Tax Social Security Benefits in 2026Retirement Tax Not all retirees who live in states that tax Social Security benefits have to pay state income taxes. Will your benefits be taxed?
-
10 Cheapest Places to Live in WashingtonProperty Tax Is Washington your go-to ski destination? These counties combine no income tax with the lowest property tax bills in the state.
-
3 Major Changes to the Charitable Deduction for 2026Tax Breaks About 144 million Americans might qualify for the 2026 universal charity deduction, while high earners face new IRS limits. Here's what to know.
-
Retirees in These 7 States Could Pay Less Property Taxes Next YearState Taxes Retirement property tax bills could be up to 65% cheaper for some older adults in 2026. Do you qualify?
-
Estate Tax Quiz: Can You Pass the Test on the 40% Federal Rate?Quiz How well do you know the new 2026 IRS rules for wealth transfer and the specific tax brackets that affect your heirs? Let's find out!
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
