Tax Notes Quotes Carolyn Schenck on Scams Linked to Capital Gains

An uptick in scams involving undistributed capital gains has caught the attention of the IRS.

The agency has seen fraudsters try to claim refundable credits for undistributed capital gains from illegitimate investment funds or real estate trusts, as well as fake claims associated with well-known organizations, according to the IRS’s 2026 “Dirty Dozen” list that warns taxpayers about evolving tax schemes.

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Carolyn A. Schenck of Caplin and Drysdale told Tax Notes that some investment vehicles, like regulated investment companies and real estate investment trusts, earn long-term capital gains that aren’t immediately distributed.

Legitimate forms report the gains and any taxes already paid so investors can claim the correct credit, but abusive schemes that create inflated or fake forms and are sometimes linked to nonexistent funds can expose taxpayers to audits, penalties, interest, and potential criminal investigation, Schenck said.

The IRS routinely compares taxpayer filings with third-party information through data matching and correspondence and may contact funds or brokers to confirm reported gains in connection with an individual audit through third-party verification, according to Schenck.

The IRS uses analytics to detect repeated or unusual claims through pattern analysis or conducts audits and investigations — methods the IRS likely uses to address the fraud, Schenck said.

To read the article in full, please visit Tax Notes’ website.