The Executive Suite: Specific tax fraud traps physicians should avoid

Our last installment provided some details and basic rules every doctor should know about tax planning, including who is responsible for the information on your tax return, details about what income you have to report, and a look at the sales techniques promoters of tax evasion use to get you to pay for their services. When it comes to clarifying questions of tax law and what crosses the line from legal tax avoidance to illegaltax evasion, I always start with the I.R.S., which provides the following detail about these specific scams that the Office of Promoter Investigations (OPI) is prosecuting participants and promoters of abusive tax avoidance transactions for using.

"We are stepping up our enforcement against abusive arrangements," said IRS Commissioner Chuck Rettig. "Don't be lulled into these shady deals. The IRS recommends that anyone who participated in one of these abusive arrangements should consult independent counsel about coming into compliance."

These aggressively marketed abusive arrangements wrap up the IRS's annual "Dirty Dozen" list and include the following red flags:

Conservation easements

I’ve previously covered syndicated conservation easements, in which 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 captive insurance arrangements

Captive insurance companies can be legitimate risk management tools for qualifying practices and their owners, but 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. Recently, the IRS has stepped up enforcement against a variation using potentially abusive offshore captive insurance companies domiciled in Puerto Rico and elsewhere.

Potentially abusive use of the US-Malta tax treaty

Though the U.S.-Malta Income Tax Treaty (Treaty) exists, some U.S. taxpayers are relying on an aggressive interpretation 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.

As such, I suggest that this strategy, if employed, is done so only by high-net worth and ultra-high net-worth individuals with the help of highly experienced legal and tax counsel that will help ensure your strict compliance with the letter of the law.
Improper claims of business credits

Improper claims for research and experimentation credit generally involve failures to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified researchexpenses. 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

Taxpayers seeking to defer capital gains upon the sale of appreciated property may be advised to organize an abusive shelter through selling those assets in monetized installment sales. These transactions occur when an intermediary purchase 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.