In the fourth and final edition of this year’s IRS Dirty Dozen list, highlighting common tax frauds, the IRS cautioned taxpayers to look out for programs being sold by unscrupulous tax promoters, including syndicated conservation easements, abusive microcaptive insurance agreements, and other abusive agreements (IR-2021-144).
Each year the service gives taxpayers a clue of what it calls “the worst of the worst tax fraud”. This year’s Dirty Dozen list was published in four parts over four days.
In its last issue, Thursday, the IRS warned taxpayers to beware of tax promoters who propagate ideas that seem “too good to be true”. The service noted that it recently set up the Funders Investigation Office to focus on participants and promoters in tax avoidance transactions.
The following are the promoter programs that are on the Dirty Dozen list, along with some of the statements made by the IRS:
- Syndicated maintenance easements. “In the case of syndicated nature conservation easements, the project promoters take a provision of tax law for nature conservation easements and twist it through inflated estimates of undeveloped land and partnerships. These abusive agreements are intended to trick the system and lead to excessive and unjustified tax deductions, often through inflated estimates of vacant lots and partnerships with no legitimate business purpose. “
- Abusive Micro-Captivity Agreements. “In abusive ‘micro-captive’ structures, promoters, accountants or wealth planners persuade the owners of closely related companies to participate in systems that lack many of the characteristics of insurance. For example, coverage may “insure” untrustworthy risks, inconsistent with real business needs, or duplicate the taxpayer’s commercial coverage. But the “premiums” paid under these agreements are often excessive and are used to circumvent tax law. “
- Potentially misuse of the US-Malta tax treaty. “Some US citizens and residents rely on an interpretation of the US-Malta Income Tax Agreement (Treaty) to take the position that they can be paid into certain Maltese retirement plans free of wealth tax and that there will be no tax consequences if the plan is sold the assets and distributes the proceeds to the US taxpayer. Ordinary profit would be recognized if the plan assets were sold and the proceeds were distributed. The IRS is examining the issue to determine the validity of these agreements and whether contractual benefits should be available in such cases and may contest the associated tax treatment. “
- Improper use of business loans. “Unauthorized use of the research and test credit usually consists in the fact that qualified research activities are not taken or proven and / or the requirements for qualified research expenditure are not met. To qualify for a Research Credit, taxpayers must evaluate and adequately document their research activities over a period of time to determine the amount of Qualified Research Expenses paid for each Qualified Research Activity. Taxpayers should carefully review reports or studies to ensure that they accurately reflect the taxpayer’s activities. “
- Improper monetized installment sales. “Promoters find taxpayers trying to defer recognition of profits from the sale of valued properties and organize abusive housing by selling them monetized installment sales. These transactions occur when an intermediary purchases a valued property from a seller in exchange for an installment payment that typically only involves interest payments, with the principal paid at the end of the term. With these agreements, the seller receives the lion’s share of the proceeds, but inappropriately delays recognition of the profit on the valued property until the final payment on the installment note, which is often planned for many years. “
As noted, Thursday’s announcement marks the fourth and final batch of this year’s Dirty Dozen list. On Monday, the IRS highlighted what it called “pandemic-related scams,” while Tuesday’s edition of the Dirty Dozen raised awareness of ” personal information scammers ”and the worried“ loopholes ”on Wednesday focused on unsuspecting victims.
For more information, see the Dirty Dozen page at IRS.gov.
– Dave Strausfeld, JD, (David.Strausfeld@aicpa-cima.com) is Senior Editor at JofA.