From the Tax Law Offices of David W. Klasing - California and the IRS are Targeting Taxpayers Who Claimed a Large Conservation Easement or Captive Insurance Deduction

IRVINE, Calif., Nov. 17, 2023 /PRNewswire/ -- The state of California is working with the Internal Revenue Service (IRS) to target taxpayers who have claimed large conservation easement or captive insurance deductions because of concerns related to the abuse and misuse of these tax benefits. Both agencies are investigating schemes where taxpayers engaged in transactions that were viewed as exploiting the tax code for financial gain rather than for the intended purposes of promoting conservation or as a means of acquiring legitimate insurance coverage.

The IRS and the FTB strongly encourage taxpayers involved in these schemes to consider voluntarily amending returns or, in appropriate circumstances, accepting settlement offers from the agencies. Doing so gives taxpayers a valuable opportunity to exit these transactions and rectify their tax filings without the looming threat of severe penalties and legal consequences including the possibility of criminal tax prosecution in egregious cases. Thankfully, the team at our law firm can help assess eligibility for such a settlement in your specific case.

Seek help from our Dual-Licensed California Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 or click here to schedule a reduced rate initial consultation.

The IRS's Crackdown on Abusive Syndicated Conservation Easement Transactions

In July 2020, the U.S. Tax Court took a significant step by invalidating four more abusive syndicated conservation easement transactions. The IRS responded by urging taxpayers involved in such transactions to promptly accept any settlement offers from the agency. Recent Tax Court rulings have solidified the IRS's stance against these syndicated conservation easement deductions, with the most recent decisions disallowing deductions totaling almost $21 million.

Explanation of Syndicated Conservation Easement Structures

For syndicated conservation easements, promoters use partnerships to syndicate ownership interests in real property. Syndicated conservation easements schemes attract prospective investors by suggesting that they may claim a conservation easement contribution deduction equal to or exceeding two and a half times their investment. Promoters obtain inflated property appraisals that unrealistically boost the value of the conservation easement, based on a fictional highest and best use of the property before the easement's imposition.

Once investors invest in the partnership, it donates a conservation easement to a land trust. Investors then claim deductions based on these inflated values, often greatly exceeding their actual investments. These, often fraudulent, deductions defy common sense and raise concerns about the validity of the reported values.

IRS's Vigilant Stance

The IRS's commitment to tackling these syndicated conservation easement deals is resolute. IRS Ex Commissioner Chuck Rettig emphasizes the agency's determination to vigorously identify, audit, and litigate these transactions. Such transactions erode trust in private land conservation and deprive the government of essential revenue. Rettig underscores the importance of seeking advice from independent, competent advisors and emphasizes that ending these abusive tax schemes remains a top IRS priority.

Legitimate Conservation Easements vs. Abusive Transactions

It is important to note that the IRS acknowledges the value of legitimate conservation easement deductions, which incentivize land preservation. However, the abusive nature of syndicated conservation easement transactions has been a concern for the IRS for several years.

Promoters of these abusive transactions have attempted to downplay the significance of recent court decisions favoring the government, often arguing that their cases are somehow different or that these decisions might be overturned on appeal. These arguments neglect to address the fundamental issues surrounding the reported values and fail to withstand judicial scrutiny.

IRS's Strong Recommendation

IRS Chief Counsel Mike Desmond emphasized that taxpayers should disregard these arguments and objectively look at their cases, urging them to cut their losses. Abusive transactions, much like settlement offers, do not improve over time. The IRS provides taxpayers with a valuable opportunity to exit these transactions. Fortunately, our Dual-Licensed California Tax Lawyers & CPAs can help explain the path to resolution in your specific case.

The IRS's Concern with Abusive Micro-Captive Insurance in California

Micro-Captive Insurance involves small businesses creating their own insurance companies to cover various risks they face. These captive insurers are typically owned or controlled by the business owners.

The IRS is concerned with abusive micro-captive insurance because of cases where these arrangements are exploited for tax evasion or avoidance. Abuses often involve inadequate risk distribution, inflated premiums, and circular cash flows, undermining the legitimacy of the setup. To address these concerns, the IRS has set guidelines and increased scrutiny. Certain micro-captive arrangements are categorized as "transactions of interest," requiring reporting and disclosure. Penalties and potential legal action may be taken against those engaging in abusive practices, ensuring that tax benefits for captive insurance are reserved for genuine risk management.

Opportunity to Resolve Abusive Micro-Captive Insurance and Syndicated Conservation Easement Transactions in California

In an effort to address potentially abusive micro-captive insurance and syndicated conservation easement transactions, the California Franchise Tax Board (FTB) has introduced Notice 2023-02. This notice allows eligible taxpayers to rectify their involvement in these transactions, reverse their deductions, and mitigate potential penalties by entering into a closing agreement. Here, we will outline the details of this initiative and the specific eligibility criteria.

Overview of FTB Notice 2023-02

FTB issued Notice 2023-02 was issued in May of 2023. As previously mentioned, it allows taxpayers to address potentially abusive micro-captive insurance and syndicated conservation easement transactions. The notice outlines the opportunity for a taxpayer to receive reduced penalties by engaging in a closing agreement to reverse their deductions and related transaction costs.

Participation Period

Eligible taxpayers are granted a specific timeframe to participate in this resolution initiative, from July 10, 2023, to November 17, 2023. No one knows if they will extend this period and how this program will be administered after this date.

Eligible Taxpayers

The FTB Notice 2023-02 resolution initiative is available to a diverse range of taxpayers. For instance, this includes individuals currently under examination by either the FTB or the IRS and those in the process of IRS appeals related to their involvement in transactions classified as eligible. Furthermore, it extends to taxpayers who have received a notice of proposed assessment from FTB regarding their participation in such transactions and are currently in protest with FTB or engaged in an appeal before the Office of Tax Appeals.

Taxpayers in litigation with the IRS concerning eligible transactions are generally eligible for this initiative, with an exception for those currently involved in litigation with the FTB regarding an eligible transaction.

There are multiple other situations where eligibility may be extended. Support from our legal team can be highly beneficial when reviewing your case to determine whether you may participate in this initiative.

Call Our Tax Lawyers for Help with Your Case in California

Get assistance from our Dual-Licensed California Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295.

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