We Represent High-Income and High-Net-Worth Taxpayers in IRS Abusive Tax Shelter Investigations
The use of abusive tax shelters by individual taxpayers can result in severe civil penalties as well as criminal prosecution. For many years now, the IRS has been aggressively pursuing individuals who use abusive tax shelters to evade taxes.
Tax Attorney Lawrence Brown has deep experience representing individuals who are suspected of using abusive tax shelters. Lawrence Brown is a former Trial Attorney with the Department of Justice Tax Division. His private practice focuses on resolving complex tax disputes including those related to abusive tax shelters.
When Is a Tax Shelter Considered “Abusive”?
Like many other complex tax mitigation strategies, there is nothing inherently unlawful about tax shelters. High-income and high-net-worth taxpayers can—and should—leverage various provisions in the Internal Revenue Code (IRC) and the IRS’s regulations to ensure that they pay no more than is legally required.
But, largely due to fraudulent tax shelters devised by unscrupulous promoters, abusive tax shelters have become a priority enforcement area for the IRS in recent years. The IRS added abusive tax shelters to its “Dirty Dozen” list in 2023 on the recommendation of the U.S. Government Accountability Office (GAO), which wrote in a report published in December 2022:
“Abusive tax schemes threaten our tax system’s integrity and contribute to the tax gap—the difference between taxes owed and paid. Often, abusive tax schemes are marketed by promoters and include complex, multi-layer transactions to attempt to conceal the true nature and ownership of the taxable income or assets.”
A tax shelter is considered “abusive” if its purpose is to allow a taxpayer to illegally evade or defeat any state or federal tax. At the federal level, tax evasion is a criminal offense that carries up to a $100,000 fine ($500,000 for corporations) and up to five years of federal imprisonment. If an abusive tax shelter investigation leads to allegations of wire fraud, money laundering or other federal crimes, the potential consequences can be far greater. Some examples of transactions that can trigger abusive tax shelter allegations and lead to charges for tax evasion and other federal financial crimes include:
- Confidential Transactions – Transactions in which the taxpayer’s identity is kept confidential can be classified as abusive tax shelters if they are executed for unlawful tax avoidance purposes. These transactions may come to light during promoter investigations—and this may in turn lead to identification and investigation of the taxpayer involved.
- Contractual Protections in Promoter Transactions – If a promoter offers the right to a refund in the event that the IRS disallows the tax benefit of a structured transaction, the IRS will generally consider this to be evidence of a potential abusive tax shelter.
- Listed Transactions – Listed transactions are transactions focused on tax mitigation that the IRS has determined to be abusive in many cases. Some examples of current listed transactions include: accelerated deductions for contributions to a defined contribution plan; debt straddles, stock compensation transactions, basis-shifting transactions, and lease-in/lease-out (LILO) transactions.
- Loss Transactions – Transactions that result in reportable losses under Section 165 of the internal revenue code can also be classified as abusive tax shelters in certain circumstances. For example, if an individual taxpayer claims losses of at least $2 million in a single tax year or $4 million in any combination of tax years, this will generally be viewed as a red flag for potential abuse by the IRS.
- Transactions of Interest (TOIs) – If the IRS determines that a transaction “ha[s] the potential for tax avoidance or evasion but lack[s] sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction,” the transaction may be flagged as a potential abusive tax shelter.
IRS Investigations Targeting Alleged Abusive Tax Shelters
Many IRS investigations targeting alleged abusive tax shelters begin in the IRS’s Office of Promoter Investigations. Established in 2021, the Office’s stated mission is to, “strengthen the IRS response to promoters and enablers of abusive tax avoidance transactions by detecting and ending the promotion, organization, and sale of abusive tax transactions.” But, the Office does not focus solely on identifying and targeting promoters. It targets taxpayers as well; and, in many cases, investigations targeting promoters will lead to scrutiny of promoters’ clients.
The IRS’s Criminal Investigation division (IRS CI) also plays an active role in uncovering alleged abusive tax shelters. IRS CI has several investigative tools at its disposal, and it often works in close coordination with both the Office of Promoter Investigations and the U.S. Department of Justice (DOJ). As a result, successfully defending against an abusive tax shelter investigation requires a coordinated and strategic defense, and this means that targeted promoters and taxpayers need highly experienced legal representation.
Defense Counsel for Taxpayers and Promoters Facing Accusations Related to Micro-Captive Insurance
The Internal Revenue Service (IRS) has undertaken widespread efforts to target abusive micro-captive insurance arrangements in recent years. Micro-captive insurance arrangements have long been on the IRS’s “Dirty Dozen” list, and enforcement litigation involving these arrangements can expose taxpayers and promoters to substantial liability—including criminal liability in some cases.
The IRS has urged taxpayers using abusive micro-captive insurance arrangements “to exit these transactions as soon as possible.” It has also shown willingness to aggressively target taxpayers and promoters suspected of using these abusive tax-avoidance schemes with litigation. Yet, not all micro-captive insurance arrangements are unlawful, and both taxpayers and promoters will have strong defenses in many cases.
The IRS is Targeting Abusive Micro-Captive Insurance Schemes
Abusive micro-captive insurance schemes are among several forms of abusive tax shelters that are high on the IRS’s list of enforcement priorities. Specifically, the IRS is targeting micro-captive insurance arrangements that allow taxpayers to avoid tax on underwriting income under Section 831(b) of the Internal Revenue Code (IRC). In these cases, the IRS typically alleges that the arrangement does not qualify as “insurance” under federal law—and therefore does not qualify for beneficial treatment under Section 831(b).
As the IRS explains:
“In 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 genuine insurance.”
To qualify as insurance, an arrangement must generally have four key attributes: (i) insurable risk; (ii) shifting of this risk to the insurer; (iii) risk distribution within the insurer’s portfolio; and, (iv) whether the arrangement constitutes insurance as this term is generally understood. Micro-captive insurance arrangements will often (though not always) lack one or more of these key attributes; and, when this is the case, the IRS will pursue allegations of unlawful tax evasion or tax fraud.
Defending Against Allegations of Micro-Captive Insurance Tax Fraud
Regardless of the circumstances at hand, taxpayers and promoters targeted in micro-captive insurance tax litigation have defenses available. At Brown, PC, we are intimately familiar with the defense strategies that can be used to fend off allegations of using or promoting an abusive micro-captive insurance scheme.
If you are facing an audit, under investigation or facing charges, we can use our experience to protect you by all means available. We handle high-stakes civil and criminal federal tax matters for taxpayers, promoters and professionals, and we have a long track record of securing favorable outcomes for our clients. But, while we can use our experience to help protect you, it is important that you engage counsel to start communicating with the IRS on your behalf as soon as possible.
We Represent Taxpayers and Promoters Accused of Using Abusive Monetized Installment Sales to Evade Federal Tax Liability
Monetized installment sale transactions are on the Internal Revenue Service’s (IRS) “Dirty Dozen” list, and the IRS proposed new regulations restricting the use of these transactions for tax avoidance purposes in 2023. It is targeting not only taxpayers who use these transactions to unlawfully evade tax, but also individuals who are accused of unlawfully promoting these “abusive tax schemes.”
Facing allegations from the IRS in relation to monetized installment sale transactions presents substantial risks for both taxpayers and promoters. As a result, experienced legal representation is critical. We have substantial experience defending high-income and high-net-worth clients in IRS audits and investigations, and we can use this experience to help protect you.
When Is a Monetized Installment Sale Transaction Considered an Abusive Tax Scheme?
As a general rule, taxpayers have the option to either report gain from an installment sale as payments are received or to “elect out” and report all of their gain from a transaction in a single year. However, as the IRS explains, the installment method does not allow sellers to improperly delay recognition of gain through interest-only payments with deferred payment of principal.
These “potentially abusive arrangements” are red flags for the IRS, and the IRS is cracking down on all forms of abusive tax shelters—including abusive monetized installment sale transactions. While monetized installment sale transactions can take many forms (including many forms that are completely legal), the IRS is focusing specifically on transactions that include the following elements:
- Sale of appreciated property to a buyer willing to pay cash or exchange other property;
- Use of an intermediary, with an agreement that provides the seller will receive interest payments from the intermediary;
- Transfer of the appreciated property to the buyer through the intermediary;
- A loan agreement that provides for interest payments from the lessor to the lender that equal the seller’s interest payments from the intermediary;
- Principal due in a balloon payment at or near the end of the term under both the installment agreement and the loan;
- The intermediary funds the loan through the proceeds paid by the buyer; and,
- The seller treats the transaction as an installment sale under Section 453 of the Internal Revenue Code (IRC) and defers recognition of gain until receipt of the principal balloon payment.
Although IRS audits and investigations targeting monetized installment sale transactions can present significant risks for both taxpayers and promoters, targeted individuals will often have strong defenses available. If you need to know more, we invite you to request a confidential consultation.
Request a Confidential Tax Shelter Defense Consultation at Brown, P.C.
To address any matters related to tax shelters 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 any and all matters related to tax shelters. Our main offices are located in the Dallas-Fort Worth, Texas metroplex and we represent clients throughout the United States and the world.