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Abusive Tax Shelters: Listed Transactions That Are Likely to Trigger IRS Scrutiny

March 15, 2024


The Internal Revenue Service (IRS) routinely targets high-income and high-net-worth taxpayers suspected of using abusive tax shelters to evade federal tax liability. Abusive tax shelters fall into several categories, the broadest of which are the IRS’ “Listed Transactions.” As federal tax audits and investigations targeting Listed transactions can present substantial risks, taxpayers targeted in these inquiries must work with an experienced Texas IRS dispute lawyer to build and execute a strategic defense.

Listed Transactions: When Tax Planning Crosses the Line to Tax Fraud (According to the IRS)

A Listed Transaction is a transaction that the IRS has determined is “the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.” The IRS maintains a catalog of these guidance documents online, dating all the way back to 1990.

While the IRS published its most recent relevant guidance document in 2017, many (if not most) of its Listed transactions remain in use today. Additionally, targeting abusive tax shelters remains a top enforcement priority for the IRS and IRS Criminal Investigation (IRS CI). As a result, high-income and high-net-worth taxpayers must heed the IRS’ guidance, and when facing scrutiny, they must work with their counsel to assess their potential exposure and make informed decisions about how best to resolve the IRS’s audit or IRS CI’s investigation.

Examples of Listed Transactions That Can Trigger IRS (or IRS CI) Scrutiny

So, when can high-income and high-net-worth taxpayers’ planning efforts trigger scrutiny from the IRS (or IRS CI)? Here are some examples of the most commonly used Listed transactions:

Syndicated Conservation Easements

Syndicated conservation easements have attracted renewed scrutiny from the IRS in recent years. Similar to other types of Listed transactions, while syndicated conservation easements are not inherently violative of the Internal Revenue Code, widespread promotion schemes and abuse have caused the IRS to scrutinize high-income and high-net-worth taxpayers’ use of these tax mitigation strategies.

Distressed Asset Trusts

The IRS defines a distressed asset trust (DAT) transaction as one that involves “a tax indifferent party . . . contribut[ing] one or more distressed assets . . . with a high basis and low fair market value to a trust or series of trusts and sub-trusts, and a U.S. taxpayer acquir[ing] an interest in the trust (and/or series of trusts and/or sub-trusts) for the purpose of shifting a built-in loss from the tax indifferent party to the U.S. taxpayer that has not incurred the economic loss.”

Abusive Life Insurance Trust Arrangements

The IRS has identified trust arrangements that allow taxpayers to claim tax benefits in connection with cash-value life insurance policies as having a high risk of fraud. The IRS initially identified these as Listed transactions in 2007, and it has issued a notice to taxpayers concerning the improper use of these trusts as recently as 2023.

Loss Importation Transactions

Transactions that involve “us[ing] offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain,” or what the IRS calls “loss importation transactions,” have also been Listed transactions since 2007. These continue to be a top enforcement priority for the IRS as well.

Intercompany Financing Through Partnerships

The IRS pays close attention to intercompany financing arrangements between related entities generally, and it has specifically identified intercompany financing agreements through special-purpose partnerships as Listed transactions.

S Corporation Tax Shelters

The IRS has also ramped up its efforts to target tax evasion schemes involving S corporations and their owners in recent years. Among other arrangements, the IRS scrutinizes those that involve efforts to shift pass-through tax liability “by purportedly donating S corporation nonvoting stock to an exempt organization while retaining the economic benefits associated with that stock.”

Abusive Foreign Tax Credit Transactions

Foreign tax planning strategies have also come under fire in recent years, with the IRS prioritizing enforcement in relation to offshore holdings and foreign entities. The IRS’s Listed transactions include transactions in which a U.S. company “purports to acquire stock in a foreign target corporation and to make an election under § 338 before selling all or substantially all of the target corporation’s assets in a preplanned transaction that generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes).”

Defending Against Federal Tax Audits and Investigations Targeting Listed transactions

When facing audits and investigations targeting suspected Listed transactions, high-income and high-net-worth taxpayers must work closely with their counsel to formulate an effective defense strategy. Depending on the circumstances, this may involve:

  • Affirmatively Demonstrating Compliance with the Internal Revenue Code – Oftentimes, suspected abusive tax shelters will be fully compliant with the Internal Revenue Code. In these cases, affirmatively demonstrating compliance can be the most efficient way to resolve an audit or investigation
  • Demonstrating that There is Insufficient Evidence to Warrant Civil or Criminal Enforcement – High-income and high-net-worth taxpayers can also often defend against abusive tax shelter investigations by demonstrating that the government lacks sufficient evidence to impose civil penalties or seek an indictment.
  • Demonstrating Reliance on an Accountant, Advisor or Promoter – While not a complete defense to liability, demonstrating reliance on an accountant, advisor or promoter can be an effective strategy for mitigating high-income and high-net-worth taxpayers’ liability when warranted.
  • Working with the IRS to Reach an Amicable Resolution – If the IRS has sufficient evidence to substantiate allegations of executing a Listed Transaction, working with the IRS to reach an amicable resolution that avoids formal charges may be the best path forward.
  • Fighting Unwarranted Penalties in Court or at the IRS Independent Office of Appeals – Finally, if negotiating with the IRS does not make sense under the circumstances presented, then the best (and only) option may be to challenge the IRS’s determination of liability in court or at the IRS’s Independent Office of Appeals.

Request a Confidential Consultation with a Texas IRS Dispute Lawyer at Brown Tax, P.C.

If you are facing scrutiny from the IRS or IRS CI in relation to a purported abusive tax shelter, we invite you to contact us for more information. To request a confidential consultation with a Texas IRS dispute lawyer at Brown Tax, P.C., please call 888-770-0025 or inquire online today.