What are IRS Abusive Transactions & Should You Avoid Them

What are IRS Abusive Transactions & Should You Avoid Them

What are IRS Abusive Transactions

One of the main priorities for the Internal Revenue Service in closing the tax gap is to ensure that U.S. taxpayers are paying the proper amount of tax. While tax planning to avoid tax can be legal if done properly, oftentimes promoters and other unscrupulous individuals will try to convince taxpayers to invest in various tax schemes that are abusive. There are many different types of abusive transactions that the IRS has honed in on over the past several years. The IRS has published extensive guidance on abusive transactions, which also includes categorizing these different transactions for reporting purposes. Whether it is an abusive trust (643(b) Trusts) or other abusive tax scheme, taxpayers need to be careful to try to avoid being enticed into investing in one of these types of promotions which can lead to headaches, heartaches — and become very costly due to the extensive fines, penalties, and interest that can be levied against the taxpayer.

Let’s look at some of the more common types of IRS abusive transactions.

Categorizing Abusive Transactions

Abusive transactions can come in different shapes and sizes. The IRS has developed different categories to better clarify this specific type of reportable transaction and then what type of reporting is necessary. That is because inherently an abusive transaction may not be illegal from the outset. Certain variations of the transaction may not be illegal at all but some promoters pushed the line and therefore taxpayers who engage in these types of transactions are required to report them.

As provided by the IRS:

Types of Reportable Transactions:

      • Listed Transactions – A transaction that 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.

      • Confidential – Transactions that are offered to a taxpayer under conditions of confidentiality and the taxpayer has paid a minimum advisor fee.

      • Contractual Protection – Transactions that are offered with the right to full or partial refund of fees if the IRS does not allow the tax benefit of the transaction.

      • Loss Transactions – Certain losses under IRC §165.

      • Transactions of Interest (TOI) – Transactions that the IRS and the Treasury Department believe to have the potential for tax avoidance or evasion but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. The TOI category of reportable transactions applies to transactions entered on or after November 2, 2006.

Syndicated Conservation Easements  

Our international tax law specialist team has written extensively about syndicated conservation easements. They are common both in the United States and abroad. From a baseline perspective, the conservation easement succeeds in providing the taxpayer with an extensive deduction that they would not ordinarily be entitled to — as a result of an excessively high appraisal coupled with a charitable donation/deduction. As you can imagine, these types of easements are ripe for scams and other scoundrels to take advantage of unsuspecting taxpayers. In fact, on January 9th, 2024 the Department of Justice issued a press release stating that two key players in abusive tax shelters involving these types of syndicated conservation easement deductions were sentenced to 25 years and 23 years for their roles in these syndicated conservation easements.

Abusive Foreign Tax Credit Transactions  

This is another very common type of (international tax) abusive transaction that the IRS has sought to eliminate. In this type of situation, a U.S. company ‘acquires’ stock in a foreign company and makes an election to generate foreign tax liability instead of U.S. tax liability. While this may seem like a legitimate transaction, this is a prearranged plan with the ultimate goal of significantly reducing U.S. tax liability by making elections that should not apply because it was not an arms-length transaction.

Malta Retirement Scheme

We have written extensively about the Malta retirement scheme.  In recent years, the Malta retirement has become of keen interest to the Internal Revenue Service. In this type of transaction, taxpayers invest in Malta retirement schemes that are not through employment,  invest large sums of money, and then treat the investment like a Roth IRA — so that they can withdraw a significant amount of money tax-free. It is important to note that taxpayers do not only invest cash into these retirement schemes but also assets that have appreciated in value, hoping to avoid having to pay any gain. The US government is pursuing both civil and criminal enforcement of Malta retirement schemes, noting that for the most part, it does seem at the current time the focus has shifted more to civil penalties than criminal penalties.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.