The IRS recently completed its four-part 2021 series on tax evaders "Dirty Dozen". The fourth installment focuses on what the service calls "taxpayer-peddled programs, including syndicated conservation easements, abusive micro-captive insurance agreements, and other abusive agreements" that warn taxpayers when "if (a program) sounds too good." to be "true, probably it is."
In conjunction with the latest Dirty Dozen publication, the IRS has warned the taxpayer public:
The IRS warns people to look out for promoters with false hopes of high tax deductions from abusive agreements. These "deals" are generally marketed by unscrupulous promoters who make false claims about their legitimacy and charge high fees. These promoters often develop new ways to defraud and aggressively market the system. Some taxpayers play the audit lottery in the hopes of going unnoticed.
The service also announced its Office of Promoter Investigation (also known as "OPI"), which is mandated to focus on participants and promoters of abusive tax avoidance transactions.
We have provided relevant excerpts from the IRS's 4th edition 2021 of its Dirty Dozen tax schema list. We urge our customers and the public to stay vigilant and find out about these widely used tax systems:
Syndicated maintenance easements
In syndicated conservation easements, property developers take a provision of tax law for conservation easements and twist it through inflated estimates of undeveloped land and partnerships. These abusive agreements are designed to trick the system and generate inflated and unjustified tax deductions, often through inflated estimates of vacant lots and partnerships with no legitimate business purpose. For more information, see IRS Increases Enforcement Activities on Syndicated Conservation Easements.
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 evade tax law. For more information, see IRS Offers Billing For Micro Captive Insurance; Letters sent to audited groups. Recently, the IRS stepped up enforcement against a variation that uses potentially abusive offshore proprietary insurance companies based in Puerto Rico and elsewhere.
Potentially improper use of the US-Malta tax treaty
Some U.S. citizens and residents rely on an interpretation of the U.S.-Malta Income Tax Treaty to take the position that they can pay in certain Maltese pension plans free of property tax and that there are no tax consequences if the plan is sold Assets and distributes the proceeds to the US taxpayer. Normally, a gain would be recognized on the sale of plan assets and the distribution of the proceeds. The IRS examines the issue to determine the validity of these agreements and whether contractual benefits should be granted in such cases, and may question the tax treatment associated with them.
Improper use of business loans
Improper 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 on the sale of valued real estate 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. Under these arrangements, 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, often many years later.