Abusive Tax Schemes: What They Are and How to Report Them to the IRS
Abusive tax schemes allow individuals or businesses to avoid paying taxes, but come with major penalties and lead to an even greater tax gap. Insiders of such schemes may be eligible for a reward if their information leads to a successful action of a scheme of $2 million or more. Read our guide to learn more!
Written By
KKC Staff
Reviewed By
Updated
May 10, 2025
Abusive tax schemes are methods individuals or groups use to avoid paying taxes or to obtain a personal or organizational tax benefit. Civil and criminal penalties are often the result of these illegal schemes because they slowly chip away and erode the integrity of the tax system.
These schemes are vast and can range from Ponzi schemes and tax havens to phantom trusts, abusive tax shelters, and abusive retirement plans, among others. These are just a few common examples, as fraudsters and criminals find new ways to exploit the IRS tax code every day.
The IRS recently published it’s Dirty Dozen campaign, warning taxpayer of promotors peddling such abusive tax schemes. They also list digital assets such as cryptocurrency, Maltese foreign individual retirement accounts, and foreign captive insurance accounts as schemes to be aware of.
Depending on the type of tax scheme and your role, you may be entitled to an award from the IRS Office of the Whistleblower for your information. Continue reading this guide to learn more about abusive tax schemes and how to report them under the IRS Form 211 and other available channels.
Key Requirements
- Whistleblowers may be rewarded between 15 and 30 percent of what the IRS collects in a successful judicial or administrative action.
- Avoided or underpaid tax amounts resulting from a scheme must surpass $2 million, which can be a cumulative total from multiple tax years.
- For individual tax amounts, the person’s annual gross income should exceed $200,000.
- The information submitted to the IRS must be detailed, credible, and verifiable independently.
- Qualified whistleblowers should use form IRS Form 211: Application for Award for Original Information
Abusive Tax Scheme Examples
As stated in the introduction, abusive tax schemes come in many forms. And there is no limit to the number of tactics a fraudster will use to avoid paying taxes. Below is a list of the most common types of tax avoidance schemes whistleblowers have successful brought to the IRS, and what the IRS is currently on the lookout for:
International
- Offshore Tax Havens – fraudsters create shell companies or trusts in these “tax havens” to hide income and assets “offshore” from the IRS.
- Offshore Credit/Debit Card – this is when a fraudster uses their offshore credit or debit card to access funds from offshore accounts.
- Offshore Digital Assets – the IRS has increased its vigilance on digital assets, such as cryptocurrency, which are used to move money offshore.
- Maltese Individual Retirement Arrangements Misusing Treaty – this involves U.S. citizens who contribute to foreign individual retirement accounts in Malta to avoid paying taxes.
- Puerto Rican and foreign captive insurance – business owners in the U.S. participate in an insurance agreement with a Puerto Rican or foreign corporation in which they have financial interest, which they use to exploit tax loopholes through various deductions.
Bogus Tax Avoidance Tactics
- Micro-captive insurance arrangements – a micro-captive is an insurance company whose owners elect to be taxed on the captive’s investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance.
- Syndicated conservation easements – participants exploit conservation easements by engaging in abusive arrangements that lead to inflated tax deductions, generating high fees for promoters while attempting to game the tax system.
Other Common Schemes
- Loan schemes – these are one of the most popular tax avoidance schemes, where directors receive their income as a loan with the intention of never repaying that loan.
- Ponzi schemes – Ponzi schemes may claim that the returns they generate are tax-free or that their tax burden can be offset through losses.
- Phantom Trusts – these are trusts set up for the sole purpose of claiming fraudulent deductions or to avoid taxes.
- Abusive Retirement Plans – these are plans that do not comply with tax laws, which lead filers to claim improper deductions.
- Charitable Remainder Annuity Trust (CRAT) – these are irrevocable trusts that permit individuals to donate assets to a charity of their choice and draw annual income.
These schemes can be difficult to detect, which is why whistleblowers, often insiders or participants of such frauds, play such an important role in preserving the integrity of the tax system.
Blowing the Whistle on Abusive Tax Schemes
To combat tax evasion and avoidance, the IRS has developed the IRS Whistleblower Office, which pays monetary awards to eligible individuals whose information is used by the IRS. However, this office is primarily concerned with extremely large tax schemes.
Those who provide specific and credible evidence of a criminal tax evasion scheme may be rewarded between 15 and 30 percent of the proceeds in cases involving $2 million or more (for organizations) and in cases where an individual’s gross income is greater than $200,000 per year.
It’s advised that those who submit a claim reach out to a whistleblower attorney who knows the process to file a claim (Form 211, Application for Award for Original Information) and who has a firm understanding of the IRS tax code.
These attorneys can help you prepare a proper description of the tax noncompliance, provide guidance on collecting supporting documents, and explain your findings in a way that is favorable to trigger an investigation.
Claim Eligibility
Any person may file a claim for an award and receive an award. However, the Whistleblower Office can deny any claim for award filed by an ineligible whistleblower. Under section 7623, those who are employed by the Department of Treasury or a federal employee who is required by federal law to disclose information of a scheme as part of their official duties, may not be eligible for an award.
Furthermore, any individual who files a claim for award based on information they obtained from an ineligible whistleblower for the purpose of avoiding the rejection of the claim that would have resulted if the claim was filed by the ineligible whistleblower.
To learn more about the IRS Whistleblower Program, please read our FAQ:
IRS Whistleblower Program: An Overview of Protections, Rewards, and Reporting
If your case does not meet the minimum threshold of $2 million, you can still contact the IRS using other methods. One is Form 14242, Report Suspected Abusive Tax Promotions or Preparers. But we highly suggest reaching out to an attorney first for a confidential, no-obligation case assessment.
Seeking Legal Assistance?
We’ve represented numerous IRS whistleblowers including Bradley Birkenfeld, former UBS banker who blew the whistle on thousands of U.S. citizens engaged in offshore Swiss banking, and recieved of one of the largest IRS whistleblower rewards in history ($104 million).
If you’re in need of legal assistance, please contact our IRS whistleblower attorneys today for a free, no-obligation consultation. Our attorneys work on a contingency basis, meaning we only get paid if we get a reward for you.
We’re here with you every step of the way to do what’s right, file award claims, and to help preserve the integrity of the U.S. tax system.
Our Firm’s Cases
$17.4 Million Award
A husband and wife team, Whistleblowers’ 21276 and 77, played the leading roles in a high-stakes confidential “sting” operation against a sophisticated international criminal enterprise that managed over $1.2 billion in offshore “secret accounts.”
$135 Million Award
In order to protect our client’s confidentiality we have not disclosed any details relating to this case. But the award highlights our firm’s expertise in ensuring that whistleblowers receive the largest award they are eligible for.
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