IRS 2021 ‘Dirty Dozen’ Scams Include Promoted Abusive Arrangements

The Internal Revenue Service adds schemes peddled by tax promoters, including syndicated conservation easements, abusive micro-captive insurance arrangements and other abusive arrangements to the 2021 “Dirty Dozen” list of tax scams.

People should be on the lookout for promoters who peddle false hopes of large tax deductions from abusive arrangements. These “deals” are typically marketed by unscrupulous promoters who make phony 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 people play the audit lottery hoping they don't get caught.

The IRS created the Office of Promoter Investigations (OPI) to focus on participants and the promoters of abusive tax avoidance transactions as a ways to fight the evolving variety of these abusive arrangements. OPI coordinates service-wide enforcement activities. The best defense for someone who is approached by a promoter is to show caution and remember that if it sounds too good to be true, it probably is.

These aggressively marketed, abusive arrangements wrap up the IRS annual “Dirty Dozen” list for 2021:

Syndicated Conservation Easements In syndicated conservation easements, promoters take a provision in the tax law for conservation easements and twist it by using inflated appraisals of undeveloped land and partnerships. These abusive arrangements are designed to play the system by generating inflated and unwarranted tax deductions, often through using inflated appraisals of undeveloped land and partnerships that have no legitimate business purpose. More information can be found in this 2019 IRS news release: 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 entities' commercial coverages. The “premiums” paid under these arrangements are often excessive and used to skirt tax law. The IRS has stepped up enforcement against a variation using potentially abusive offshore captive insurance companies domiciled in Puerto Rico and elsewhere. This 2019 IRS news release, IRS offers settlement for micro-captive insurance schemes; letters being mailed to groups under audit, contains has more details.

Potentially Abusive 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 (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 this 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. You can find the text and technical explanation of the Treaty on the IRS' Malta Tax Treaty Documents page.

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. In order to claim a research credit, people have to 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, and they should review reports or studies carefully to ensure that they accurately reflect their activities. This March 2019 IRS News Release: Avoid improper claims for business credits; topic makes this year’s IRS “Dirty Dozen” list has a video along with further reading material.

Improper Monetized Installment Sales Promoters find people who are looking to defer the recognition of gain upon the sale of appreciated property, then organize an abusive shelter through selling them monetized installment sales. These transactions happen when an intermediary purchases appreciated property from a seller in exchange for an installment note, which usually 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. Installment sales of property are covered in this IRS Tax Topic: Topic No. 705 Installment Sales.

The IRS continues to pursue action against the people who promote these schemes and the people who participate in them.

Resources:

The IRS News Release "Dirty Dozen"