The 2021 IRS "Dirty Dozen" – The Final Round
In our fourth and final submission regarding the 2021 IRS Dirty Dozen, we'll take a look at what the IRS calls "promoted abusive arrangements. You can check out the scams written about in my first three installments of this weekly column published over the last three successive weeks.
The IRS is warning people to be on the alert for tax promoters who aggressively are peddling false hopes of large tax deductions from the following abusive arrangements. While for most people, these are fairly limited in their applicability, still they may be something about which you need to be aware.
Syndicated conservation easement 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 www.irs.gov/newsroom/irs-increases-enforcement-action-on-syndicated-conservation-easements.
In abusive micro-captive arrangements, promoters persuade owners of closely held entities to participate in schemes that seem like insurance but 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 so-called "premiums" paid under these arrangements are often excessive and used to skirt tax law. Additional information can be found at www.irs.gov/newsroom/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 is next (and new) on the list. 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. It may challenge the associated tax treatment, so beware before entering into such a transaction.
Improper business credit 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, you must evaluate and appropriately document your research activities over a period of time to establish the amount of qualified research expenses paid for each qualified research activity. Affected taxpayers should carefully review reports or studies to ensure they accurately reflect the taxpayer's activities.
Improper monetized installment sales are the final scheme on the list. 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.
The IRS is continuing to pursue actions against promoters of these schemes as well as the taxpayers who participate in them. Says IRS Commissioner Chuck Rettig, "We are stepping up our enforcement against abusive arrangements. Don't be lulled into these shady deals. The IRS recommends that anyone who participated in one of these abusive arrangements should consult independent counsel about coming into compliance."
And that's it for this year's IRS Dirty Dozen. While it's not possible to totally stop unscrupulous behavior, armed with the knowledge I've presented over the last four weeks and taking great care, you can avoid becoming an unwitting victim of the "Dirty Dozen"!
