This year’s Dirty Dozen is separated into four separate categories:
The IRS advises taxpayers to be on the lookout for fraudsters who set up fake nonprofit organizations. These scammers are especially inclined to attempt to take advantage of tragedies and disasters, such as the COVID-19 pandemic.
Scams involving a request over the phone for a donation to a fake charity for disaster relief efforts are common. Taxpayers should always check out a charity before making a donation and not feel pressured to give immediately.
To check the status of a charity, use the IRS Tax Exempt Organization Search tool. https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations
Conservation easements consist of a grant of an easement by a landowner to a qualified organization, typically a non-profit, in which the donor and recipient agree to permanently restrict the development and use of the donated land for the purpose of achieving conservation objectives. To incentivize the conservation of natural resources of historical significance the Internal Revenue Code (“IRC”) permits taxpayers who donate land to take a tax deduction in the amount of the value of the land given.
In an abusive conservation easement arrangement taxpayers attempt to game the system by donating property using inflated appraisals of undeveloped land and thereby taking unwarranted tax deductions. According to the IRS Commissioner Rettig putting an end to these abusive schemes is a high priority for the IRS.
Captive insurance is a form of self-insurance in which a taxpayer creates insurance company to provide coverage in exchange for a tax deductible premium. In abusive micro-captive structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in arrangements in which the “premiums” are often excessive and used to skirt tax law. Recently, the IRS has stepped up enforcement against potentially abusive captive insurance companies.
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. According to the IRS an improper claim for the research and experimentation credit occurs when the taxpayer fails to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified research expenses. Taxpayers should carefully review reports or studies to ensure they actually satisfy the requirements to take research credits.
Under IRC Section 453 a taxpayer can defer the recognition of gain upon the sale of appreciated property by realizing taxable income only when cash is received from the buyer. An improper monetized installment sale occurs when an intermediary purchases appreciated property from a seller in exchange for an installment note, which typically provides for payments of interest first, with principal being paid at the end of the term. In these arrangements, the seller will typically receive the lion share of the proceeds but still delay gain recognition until the final payment on the installment note.
The Service continues to pursue actions against promoters of tax schemes as well as the taxpayers who participate in them.