Dirty Dozen tax scams: Abusive tax shelters make the list

WASHINGTON — The Internal Revenue Service today warned taxpayers to be wary of abusive tax shelters, which remain on the “Dirty Dozen” tax scams.

These sophisticated schemes, particularly those involving micro-captive insurance shelters, can be peddled by promoters and others to avoid taxes.

The annually compiled “Dirty Dozen” list describes a variety of common scams that taxpayers may encounter. Many of these schemes peak during tax season, and the agency wants taxpayers to remain on alert for them.

These scams can range from simple schemes to inflate refunds to more elaborate efforts related to tax shelters.

Through audits, litigation, published guidance and legislation, the IRS continues to address those using abusive micro-captive insurance tax shelters.

Tax law generally allows businesses to create “captive” insurance companies to protect against certain risks. Traditional captive insurance typically allows a taxpayer to reduce insurance costs. The insured business claims deductions for premiums paid for insurance policies. Those amounts are paid, either as insurance premiums or reinsurance premiums, to a “captive” insurance company owned by the insured or parties related to the insured.

Under section 831(b) of the tax code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of annual net premiums from income so that the captive insurer pays tax only on its investment income.

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