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The IRS is coming for tax shelters

There’s nothing wrong with using certain tax arrangements. Just make sure you’re using them properly. 
October 18, 2023

By Lance Wallach 

The U.S. Internal Revenue Service (IRS) plans to hire up to 200 additional attorneys to help the agency combat syndicated conservation easements, abusive micro-captive insurance arrangements, and other tax schemes.  

Syndicated conservation easements 

Since 2020, syndicated conservation easements have been a focus for the IRS Criminal Investigations unit. In December 2020, the Department of Justice announced a guilty plea entered in the first-ever criminal case pursued by IRS Criminal Investigations that involved conservation easements to the tune of nearly $1.2 billion in fraudulent tax deductions.  

The IRS may challenge any one or more requirements of a charitable conservation easement tax deduction, including the purported perpetuity of the transferred interest, the nature of the restrictions, the public benefit to be achieved, and whether the donee organization has resources to enforce the restriction as defined in U.S. Treasury regulations.  

Any investor or promoter involved in a syndicated conservation easement should take caution and evaluate whether the deductions represented, taken or pursued are appropriate and defendable under IRC Section 170 and corresponding Treasury regulations because the IRS is seeking to engage hundreds of attorneys to review these transactions to show otherwise.  

Micro-captive insurance arrangements 

The IRS has had micro-captive insurance arrangements on its radar for several years. In 2016, the agency released Notice 2016-66 stating certain micro-captive insurance company transactions had the potential for tax avoidance or evasion. The IRS has consistently disallowed the tax benefits claimed by taxpayers in abusive micro-captive structures. Following its string of victories in court, the IRS offered settlements to more than 200 taxpayers who were under examination for similar issues.  

Starting in 2017, the IRS began attacking small captive plans. In Avrahami v. Commissioner, 149 TC No. 7, the U.S. Tax Court disallowed the Avrahamis’ insurance premium deductions for amounts paid to a purported captive insurance company. The IRS found that the entity they claimed was their captive insurance company did not meet the stated requirement of a micro-captive and was not an insurance company for 831 (b) purposes. The Tax Court also held the couple liable for taxes on unreported interest and dividends and for some accuracy-related penalties. This was followed by a few more IRS wins in tax court against micro or small 831 (b) captive insurance arrangements.  

Employee Retention Credit claims 

The Employee Retention Credit (ERC) is at the top of the IRS 2023 “Dirty Dozen” list. The agency has renewed its warning urging people to carefully review ERC guidelines before trying to claim the credit, as promoters continue pushing ineligible people to file.  

Third parties are aggressively promoting ERC schemes on radio and online — charging large upfront fees or a fee that is contingent on the amount of the refund. And the promoters may not inform taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit. 

Stay on the right side of the law 

There is nothing wrong with conservation easements, captive insurance or Employee Retention Credits when utilized properly. Of the hundreds of phone calls I have received recently, in my opinion most of the people were misusing these potentially abusive tax shelters. Not only can the misuse of these programs result in IRS audits, sometimes criminal prosecution is the final result.  

If you are involved with any of these arrangements as a CPA, the IRS could call you a material advisor, which could result in a large fine and potential disciplinary actions. Over the years, I have received a surprisingly large number of phone calls from CPAs facing this issue and/or being sued by their clients. Simply signing a client’s tax return containing an abusive tax shelter on it could cause IRS problems for the CPA.  

Lance Wallach is a frequent speaker and writer on abusive tax shelters, captive insurance, conservation easements and ERCs. Named a speaker of the year by the National Society of Accountants and a member of the AICPA faculty of teaching professionals, he has written several books on protecting clients from fraud and other topics. Lance also offers expert witness testimony.  

Email: [email protected] 
Phone: (516) 236-8440