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 Consultation at Brown, PC
We represent select high-income and high-net-worth clients in significant federal tax controversies. If you are facing scrutiny from the IRS in relation to your use or promotion of a monetized installment sale transaction, you can call 888-870-0025 or send us a message online to request an appointment with a federal tax attorney at Brown, PC