The IRS recently concluded its 2021 four-part series of the “Dirty Dozen” tax-related scams. The fourth installment focuses on what the Service refers to as “schemes peddled by tax promoters, including syndicated conservation easements, abusive micro-captive insurance arrangements and other abusive arrangements,” warning taxpayers that if “if [a program] sounds too good to be true, it probably is.”
In conjunction with the latest Dirty Dozen publication, the IRS issued a warning to the taxpaying public:
The IRS warns people to be on the lookout for promoters who peddle false hopes of large tax deductions from abusive arrangements. These “deals” are generally marketed by unscrupulous promoters who make false claims about their legitimacy and charge high fees to boot. These promoters frequently devise new ways to cheat the system and market them aggressively. Some taxpayers play the audit lottery hoping they don’t get noticed.
The Service also touted its Office of Promoter Investigation (also known as “OPI”), which has a mandate to focus on participants and promoters of abusive tax avoidance transactions.
We have provided relevant excerpts from the IRS’s fourth 2021 installment of its Dirty Dozen tax-scheme list. We urge clients and the public to remain on guard and educated about these widespread tax schemes:
Syndicated conservation easements
In syndicated conservation easements promoters take a provision of tax law for conservation easements and twist it through using inflated appraisals of undeveloped land and partnerships. These abusive arrangements are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of a legitimate business purpose. More information can be found at IRS increases enforcement action on Syndicated Conservation Easements.
Abusive micro-captive arrangements
In abusive “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of insurance. For example, coverages may “insure” implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages. But the “premiums” paid under these arrangements are often excessive and used to skirt tax law. Additional information can be found at IRS offers settlement for micro-captive insurance schemes; letters being mailed to groups under audit. Recently, the IRS has stepped up enforcement against a variation using potentially abusive offshore captive insurance companies domiciled in Puerto Rico and elsewhere.
Potentially abusive use of the US-Malta tax treaty
Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.
Improper claims of business credits
Improper claims for the research and experimentation credit generally involve failures to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified research expenses. To claim a research credit, taxpayers must evaluate and appropriately document their research activities over a period of time to establish the amount of qualified research expenses paid for each qualified research activity. Taxpayers should carefully review reports or studies to ensure they accurately reflect the taxpayer’s activities.
Improper monetized installment sales
Promoters find taxpayers seeking to defer the recognition of gain upon the sale of appreciated property and organize an abusive shelter through selling them monetized installment sales. These transactions occur when an intermediary purchases appreciated property from a seller in exchange for an installment note, which typically provides for payments of interest only, with principal being paid at the end of the term. In these arrangements, the seller gets the lion’s share of the proceeds but improperly delays the gain recognition on the appreciated property until the final payment on the installment note, often slated for many years later.