For many years now, the IRS has been aggressively pursuing individuals and entities responsible for marketing, selling or promoting abusive tax shelters. At the very least, the IRS seeks severe civil penalties from these individuals and entities and many times proceeds criminally against them.
Tax Attorney Lawrence Brown has deep experience representing tax shelter promoters. Lawrence Brown is a former Trial Attorney with the Department of Justice Tax Division. His private practice focuses on resolving complex tax disputes including tax shelter promoter investigations.
Are You a Tax Shelter Promoter (According to the IRS)?
The IRS targets tax shelter promoters under Section 6700 of the Internal Revenue Code (IRC). Under Section 6700, an accountant, attorney or other individual may be classified as a tax shelter promoter if the individual:
- Organizes (or assists in the organization of) an entity, investment plan or other arrangement; or,
- Participates (directly or indirectly) in the sale of an interest in an entity, investment plan or arrangement; and,
- As a result of either of the foregoing, assists with securing any tax benefit through false or fraudulent means or grossly overstating the value of the entity, investment plan or other arrangement involved.
This definition is extremely broad; and as a result, it allows the IRS to pursue cases against alleged promoters in a wide range of circumstances. When seeking to identify tax promoters, the IRS typically looks for a number of red flags. For example, according to the IRS, red flags for abusive tax shelters include:
- Confidential transactions that are apparently structured for unlawful tax avoidance purposes
- Promoters who offer refunds if the IRS disallows preferential tax treatment
- Tax shelters that involve accelerated deductions for defined contribution plans, debt straddles, lease-in/lease-out (LILO) transactions and other listed transactions
- Transactions that result in reportable losses under Section 165 of the IRC
- Transactions that lack adequate substantiation to confirm IRC compliance (which the IRS refers to as “transactions of interest”)
Crucially, none of these red flags are necessarily indicative of fraud. The tax code is extraordinarily complex, and it allows taxpayers to use a variety of complex transactions and structures to mitigate their federal tax liability. Additionally, even if you may have arguably assisted taxpayers with implementing abusive tax shelters, you still have defenses available. An experienced tax attorney can help protect you; and, if you are facing scrutiny from the IRS, engaging defense counsel before this scrutiny leads to charges will provide the greatest opportunity for a favorable outcome.
Understanding the Risks of Being Labeled a Tax Shelter Promoter
What are the risks of being labeled an abusive tax shelter promoter by the IRS? The short answer is, “It depends.” The IRS and U.S. Department of Justice (DOJ) both pursue a wide range of charges against alleged tax shelter promoters, and these charges can either be civil or criminal in nature.
Civil Penalties for Tax Shelter Promoters
In civil enforcement actions, individuals who are accused of promoting abusive tax shelters can face monetary penalties. Licensed professionals, including attorneys and accountants, can also face disciplinary action by the IRS Office of Professional Responsibility (OPR). Paying civil monetary penalties can trigger automatic scrutiny from the IRS OPR, so it is imperative that licensed professionals not simply pay IRS-imposed fines in order to move on. Instead, targeted professionals must engage experienced defense counsel to ensure that they are doing everything necessary to protect themselves.
Criminal Penalties for Tax Shelter Promoters
When charged with criminally facilitating the use of abusive tax shelters, alleged promoters can face substantial penalties. Charges in tax shelter promoter cases can include criminal violations of the IRS as well as violations of other federal criminal statutes. The fines in these cases can easily climb into the six figures (and can be significantly higher), and convictions can also lead to federal imprisonment.
Facing an Investigation for Promoting an Abusive Tax Shelter
With these risks in mind, if you are facing an investigation for promoting an abusive tax shelter, executing a strategic defense should be your first priority. At Brown, PC, we represent select clients in high-stakes federal tax controversies. If you are at risk for substantial penalties as a result of facing scrutiny from the IRS, IRS OPR or any other federal authority, we invite you to contact us for more information.
When we represent clients in tax shelter promoter investigations, we focus on protecting our clients against all potential risks. This includes not only the risk of civil or criminal penalties, but also the risk of disciplinary action by the IRS OPR and the risk of facing negative publicity. We represent clients who have a lot to lose, and we rely on our experience to protect them by all means available.
Texas IRS Lawyer Experienced in High-Stakes Tax Shelter Promoter Investigation Defense
If the Internal Revenue Service (IRS) is targeting you as a tax shelter promoter, you need to be prepared to defend yourself by all means available. Tax shelter promoter investigations can lead to serious criminal charges; and, while it is possible to avoid prosecution, doing so requires a coordinated and strategic defense. Texas IRS lawyer Lawrence Brown has extensive experience representing clients in these investigations, and he can use his experience to protect you.
But, it is important that you contact us promptly. When you are facing an IRS investigation, time is of the essence. By the time you find out that you are under investigation, the inquiry is already well underway, and the IRS isn’t going to wait for you to catch up. As a result, you (and your counsel) need to work quickly to get up to speed—and you need to focus your efforts on doing everything you can to make sure the IRS’s investigation does not lead to criminal charges.
What To Do if You Are Facing an IRS Tax Shelter Promoter Investigation
Due to the risks involved, if you are facing an IRS tax shelter promoter investigation, you need to act quickly to protect yourself. Among other critical steps, as soon as possible, you should:
- Carefully Review Any Correspondence from the IRS – You should carefully review any correspondence (or other documents) you have received from the IRS. If you have received a target letter, subpoena or any other form of communication, you need to ensure that you have a clear understanding of why the IRS has contacted you and what information it is requesting, and you need to ensure that you are aware of any pending deadlines to respond. You should be sure to have these available to provide to your Texas IRS attorney as well.
- Preserve Any Relevant Documentation – When facing an IRS investigation, it is important to preserve any relevant (or potentially relevant) documentation. Deleting or destroying relevant records can not only raise red flags, but it can also lead to prosecution regardless of whether the government ultimately pursues charges against you for illegal tax shelter promotion. Your Texas IRS attorney will be able to help ensure that you do not unnecessarily or inadvertently disclose potentially damaging records to the IRS.
- Consult with a Texas IRS Lawyer – Successfully defending against an IRS tax shelter promoter investigation requires a clear and comprehensive understanding of the relevant facts and the relevant law. It also requires the ability to deal with the IRS effectively. Engaging experienced legal counsel is critical; and, again, you should consult with a Texas IRS lawyer as soon as possible.
While these are three important steps to take when you are facing scrutiny from the IRS, these are far from the only steps you need to take to protect yourself. When you speak with Texas IRS lawyer Lawrence Brown about your case in confidence, he will explain everything you need to do in order to maximize your chances of avoiding criminal prosecution.
What To Expect During the Investigation Process
Along with knowing what it takes to prepare an effective defense, it is also important to know what to expect during the investigation process. This will allow you to anticipate the IRS’s next steps—and this will allow you to regain ground as you work to reestablish control of your situation. So, what can you expect? Broadly speaking, there are three critical stages in a typical IRS tax shelter promoter investigation:
- The IRS’s Unilateral Information Gathering – The IRS will unilaterally gather information through various means. Along with reviewing relevant filings (including your client’s filings), the IRS may also contact suspected co-conspirators, perform data analysis and leverage its other investigative tools to gather information without your knowledge.
- Responding to Formal and Informal Requests from the IRS – But, the IRS will most likely need to gather information from you as well; and, to do so, it may issue a variety of formal and informal requests. Determining how to respond to these requests requires the advice and insights of an experienced Texas IRS lawyer.
- Evaluating Potential Means of Resolution – Once sufficient information is on the table, both sides will begin evaluating potential means of resolution. As discussed below, generally speaking, these investigations can have three potential outcomes, each of which can be more or less likely under varying circumstances.
This is an extremely abbreviated overview of the IRS’s investigation process, and different investigations can proceed in different ways. To ensure that you are making informed decisions in real time, you will need to work closely with your defense counsel to remain abreast of the IRS’s investigative activities and evaluate the options you have available.
3 Options for Resolving Tax Shelter Promoter Investigations with the IRS
Recognizing that individual circumstances vary, generally speaking, there are three options for resolving a tax shelter promoter investigation with the IRS. These options are:
1. Close the Investigation Without Further Action
The best-case scenario is to close the investigation without further action. Texas IRS lawyer Lawrence Brown has substantial experience securing resolutions for his clients at the investigative stage.
2. Negotiate a Settlement with the IRS
If avoiding consequences entirely is not feasible under the circumstances at hand, then the next best option may be to negotiate a settlement with the IRS. Lawrence Brown has substantial experience representing his clients in IRS settlement negotiations as well.
3. Defend Against the IRS’s Allegations in Federal Court
If settling is not in your best interest and the IRS is intent on pursuing charges, then you may be forced to defend against the IRS’s allegations in federal court. With decades of experience, Lawrence Brown has the knowledge, insights and skills required to provide effective trial representation.
When Is a Tax Shelter Considered “Abusive?” An Experienced Texas IRS Lawyer Explains
The Internal Revenue Service (IRS) targets high-income and high-net-worth taxpayers who use “abusive” tax shelters to evade federal income tax liability. However, there often is a fine line between using an abusive tax shelter and engaging in strategic tax planning. As a result, many audits and investigations targeting allegedly abusive tax shelters are misguided, and avoiding unwarranted liability in these cases is a matter of working with an experienced Texas tax attorney to demonstrate compliance with the Internal Revenue Code.
Of course, this is often easier said than done. High-income and high-net-worth tax planning strategies can be extremely complex, and when in doubt, revenue agents will typically err on the side of non-compliance. With this in mind, it is important for taxpayers who use these strategies to be aware of the risks involved and to rely on their counsel to proactively generate the documentation they need to withstand scrutiny from the IRS if necessary.
Examples of Tax Shelters Commonly Targeted By the IRS
When can high-income and high-net-worth taxpayers face scrutiny related to their alleged use of abusive tax shelters? Here are some examples of tax shelters commonly targeted by the IRS:
Intercompany Financing and Transactions
The IRS closely scrutinizes intercompany financing arrangements and other transactions between related business entities. While these are not inherently unlawful—and these types of arrangements and transactions can serve a variety of legitimate tax-related and non-tax-related purposes—the IRS views them as presenting a high risk of fraud. As with other types of tax planning strategies, when used for tax planning purposes, thorough documentation is essential for avoiding (or withstanding, if necessary) scrutiny from the IRS in relation to all types of intercompany transactions.
Loss Importation Transactions
The IRS also pays close attention to transactions that it classifies as “loss importation transactions.” These are transactions “in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income.” As discussed below, this is just one example of many types of cross-border transactions that can raise fraud concerns at the IRS.
Offshore Accounts and Other Foreign Holdings
Along with loss importation transactions, the IRS classifies many other transactions and structures involving foreign holdings as abusive tax shelters as well. These include undisclosed offshore accounts, undisclosed interests in foreign businesses and foreign tax credit transactions, among many others. Offshore disclosure compliance is an enforcement priority for the IRS generally, and, when combined with concerns about potential tax fraud, taxpayers’ offshore holdings can trigger invasive IRS audits.
Syndicated Conservation Easements
Syndicated conservation easements have garnered attention from the IRS in recent years due to the aggressive promotion of syndicated conservation easements that violate the Internal Revenue Code. However, syndicated conservation easements are not inherently unlawful—and many high-income and high-net-worth taxpayers use them as tools for tax mitigation. Once again, thorough documentation is critical, and for taxpayers who have been approached by promoters, it is important to consult with a Texas IRS lawyer who can ensure that your tax mitigation strategy is fully compliant.
Trust Arrangements
The IRS classifies various types of trust arrangements as potential abusive tax shelters—though, here too, these arrangements are frequently used for lawful tax planning purposes. Some examples of trust arrangements that are likely to trigger scrutiny from the IRS include:
- Cash-Value Life Insurance Trusts
- Charitable Remainder Trusts
- Contested Liability Trusts
- Distressed Asset Trusts
- Guam Trusts
Again, these are just examples. When using trusts for tax planning purposes, high-income and high-net-worth taxpayers should consult with their counsel to ensure that they are not setting themselves up for exposure to liability for back taxes, interest and penalties. At Brown, P.C., we both work with taxpayers to help them affirmatively establish compliance and defend their tax planning strategies to the IRS when necessary. As a result, if you have questions about using trusts for tax planning purposes or if you are facing an IRS audit related to your strategic use of tax planning trusts, we encourage you to contact us promptly for more information.
Potential Red Flags for Abusive Tax Shelters (According to the IRS)
While the IRS is prioritizing enforcement in cases involving high-income and high-net-worth taxpayers’ use of abusive tax shelters, it simply doesn’t have the resources to identify and audit all concerning entity structures, trusts, offshore holdings and transactions. As a result, to determine how best to deploy its resources, the IRS focuses on a variety of “red flags” for abuse. These include (but are not limited to):
- Using Tax Shelters that Are Commonly the Subject of Fraudulent Promotion Schemes
- Using Complex Transactions, Trust Arrangements and Corporate Structures to Shift Basis in Appreciated or Depreciated Assets
- Shifting Gains or Losses Between Related Entities
- Claiming Substantial Losses or Tax Benefits Not Claimed in Prior Tax Years
- Lack of Substantiation Made Available to the IRS
Here, too, these are just examples. Additionally, while the IRS generally views these as red flags for abusive tax shelters, none of these are inherently indicative of fraud. As a result, regardless of the circumstances or allegations at hand, high-income and high-net-worth taxpayers accused of leveraging abusive tax shelters can—and should—engage an experienced Texas tax attorney to interface with the IRS on their behalf. At Brown, P.C., we regularly represent clients in these types of matters, and we can use our experience to help ensure that you are not unfairly penalized for engaging in strategic tax planning.
Speak with a Tax Shelter Promoter Defense Attorney at Brown, PC
To address tax shelter promoter investigation issues with a highly qualified tax lawyer, contact Brown, PC at 888-870-0025 or e-mail the law firm through this Web site for legal counsel regarding tax shelter promoter investigation issues. Our main offices are located in the Dallas-Fort Worth, Texas metroplex and we represent clients throughout the United States and the world.