In the fourth and final installment of this year’s IRS “Dirty Dozen” list, which highlights common tax-related scams, the IRS cautioned taxpayers to be on the lookout for schemes peddled by unscrupulous tax promoters, including syndicated conservation easements, abusive microcaptive insurance arrangements, and other abusive arrangements (IR-2021-144).
Each year, the Service issues an advisory to taxpayers about what it calls “the worst of the worst tax scams.” This year’s Dirty Dozen list was released in four installments over four days.
In Thursday’s installment, the final one, the IRS cautioned taxpayers to beware tax promoters pushing ideas that seem “too good to be true.” The Service noted that it recently created the Office of Promoter Investigations to focus on participants and the promoters of abusive tax avoidance transactions.
Below are the promoter schemes included in the Dirty Dozen list, along with some of what the IRS said about them:
- 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.”
- Abusive microcaptive 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.”
- Potentially abusive use of the United States–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.”
As noted above, Thursday’s announcement represents the fourth and final batch of this year’s Dirty Dozen list. On Monday the IRS highlighted what it characterized as “pandemic-related scams,” while Tuesday’s installment of the Dirty Dozen raised awareness of “personal information cons” and Wednesday’s concerned “ruses” focusing on unsuspecting victims.
For more, see the Dirty Dozen page at IRS.gov.
— Dave Strausfeld, J.D., (David.Strausfeld@aicpa-cima.com) is a Tax Adviser senior editor.