The Executive Suite: Tax savings plans targeting physicians require caution

Tax savings plans targeting doctors require careful due diligence. We examine some of the basics every physician should be aware of.

Our return to work after Labor Day marks the start of the 3rd quarter, when tax plans targeting doctors traditionally turn up their sales pressure. While I’m certainly in favor of you using all legal methods available to minimize income taxes, the abuse of legitimate tax plans by various plan promoters and their clients is common. It’s also unfortunately common that some plans that sound reasonable and that are presented by seemingly credible salespeople, lack any legal basis whatsoever.

We are also in the middle of both an election season that may bring significant changes to current tax laws and multiple economic crises that increase the need to retain as much of your income as possible. Promoters of all skill levels are acutely aware of all these issues and some may use that knowledge and the contentious nature of current politics to play upon your fears or their claimed affinity with your particular political beliefs. In the best cases they are merely playing on your emotions, in the worst cases they are engaging in actual affinity fraud that may center around tax planning or investments including currency trading and cryptocurrency.

Remember That You Are Always Responsible

No matter who you rely on for tax advice, it is vital that you always remember that you, the taxpayer, are the legally responsible party for the information contained in your tax return and the legality of any deductions or tax strategy you use. While some licensed advisors may have professional liability for any advice they give you, the taxes, interest, penalties, and potential civil and criminal legal liability are your problem, and your expense. Not only will you have to recover from an advisor for their errors and omissions separately, in some cases they become an additional legal liability, as I’ve previous detailed in several discussions on captive insurance company audits.

Check With the IRS First and Know The Dirty Dozen

Due diligence is vital, and the first place I look to is always the IRS itself. The IRS.gov website has plain-English explanations of a variety of tax plans and the compliance details each requires. It also provides a way to report abusive transactions and identifies the worst plans that receive the greatest scrutiny both on the annual “Dirty Dozen List” of tax scams and on the larger and more detailed “listed transactions” list that should be an immediate red flag and indication that you need a second opinion if you see a transaction you are involved in described.

Two Specific Strategies IRS is Looking At Closely This Year

I previously covered some of the details that can make a technically legitimate strategy like conservation easements into an abusive one and how well-meaning physicians can bring each other into harm’s way when sharing an “opportunity”. My friend and colleague, Jay Adkisson , added additional color to this strategy in a his recent article for Forbes that details the negative attention they recently received from the U.S. Senate; it predicts rough seas ahead.

Similarly, captive insurance companies, and the 831(b) micro-captives that physicians in particular often end up in, continue to face scrutiny and the I.R.S. has actually sent two warning letters to micro-captive owners advising them to get a second opinion and come clean about any compliance issues and voluntarily pay what they owe. Essentially, “Don’t make us come get you”.

Finally, consider these questions about any tax promoter:

Are they a licensed professional like a CPA, CFP, attorney etc. that may have attorney client privilege on your communications and both a fiduciary duty to provide accurate advice and professional liability for failing to do so?
Is the promoter raising red flags for possible tax fraud like one or more of the following?
They require an NDA agreement and that you keep their “proprietary” advice confidential, including from your other advisors?
They use questionable sales techniques emphasize emotional issues like politics and name dropping of the “rich and famous people” that use these “secret strategies” rather than identifying specific tax code, law and etc.

They are unwilling or unable to provide written materials about their strategy or to answer questions
Do they have specific training and experience beyond just sales and do they have a proven history with the strategy?