IRS Dirty Dozen Part 2 – Captive Insurance & Installment Sales Scams

Speech bubble with two of the IRS Dirty Dozen ScamsLast time, we introduced you to the first two scams from the IRS Dirty Dozen – its annual list of top tax scams fraudsters are utilizing to rob unsuspecting victims of thousands of dollars. It’s important to have this information and HW&Co. urges you to share this list with family and friends.

Today, we present you with two more prevalent scams: foreign captive insurance and monetized installment sales. Read about these new schemes to help prevent yourself from becoming a victim.

3: Puerto Rican and Other Foreign Captive Insurance

In these scams, U.S owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner has a financial interest. The U.S.-based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation.

The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered, non-arm’s-length pricing, and lack of business purpose for entering into the arrangement.

4: Monetized Installment Sales

These scams involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans. In a typical transaction, the seller enters into a contract to sell appreciated property to a buyer for cash and then purports to sell the same property to an intermediary in return for an installment note. The intermediary then purports to sell the property to the buyer and receives the cash purchase price.

Through a series of related steps, the seller receives an amount equivalent to the sales price, less various transactional fees, in the form of a purported loan that is non-recourse and unsecured.

Taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits. Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, such as filing an amended return and seeking independent advice.

Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list, and the IRS may assert accuracy-related penalties ranging from 20% to 40%, or a civil fraud penalty of 75% of any underpayment of tax.

For more information, please visit the IRS website or contact an HW&Co. Advisor today.

Keep reading for more of the IRS Dirty Dozen list.