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IRS audits have been extremely rare over the past decade, due to the dramatic decline in the number of Revenue Agents resulting from budget cuts, as well as added responsibilities for those in the field. However, don’t expect this trend to continue.
Rather, audit rates are predicted to jump in future years as Democrats increase IRS funding, boosting audits targeting high-income earners and tax shelters in order to raise revenue to finance their unprecedented government spending programs. According to IRS Commissioner Charles Rettig, the IRS hired 10,000 employees back in 2019 and plans to use these additional resources to increase audits targeting high-income earners with listed transactions first. This will put doctors who purchased syndicated conservation easements, and other abusive tax shelters, in the IRS’ crosshairs.
Moreover, the IRS plans to add an additional 250 agents to its Criminal Investigation Division (CID) each year. As mentioned above, one of the tax shelters they’re targeting is known as syndicated conservation easements. In December 2020, the CID scored their first victory in this area, as three Atlanta-area promoters pleaded guilty to criminal tax charges for their role in creating more than $1.2 billion in fraudulent federal income tax deductions. The IRS estimates more than 32,000 taxpayers participated in syndicated conservation easements in 2018 alone, leading us to conclude that the IRS’ work has only just begun.
What’s a Conservation Easement?
A conservation easement is simply a deed or legal agreement between a landowner and a qualified non-profit organization, such as a charitable land trust, or a federal, state or local governmental agency, that restricts the use of the land. In return, the landowner is allowed a charitable contribution income tax deduction equal to the difference in the value of the land before, and after, the easement is applied, so long as certain detailed requirements are met. This strategy can yield great results for doctors purchasing second homes, or hunting property, if it is handled and documented correctly.
What’s a Syndicated Conservation Easement?
In a syndicated conservation easement, a partnership purchases land with the intent of maximizing the charitable contribution income tax deductions available. Promoters purchase these tracts of land on behalf of investors. Once purchased, the promoters obtain inflated appraisals, claiming the land can be used for various developmental purposes that would justify dramatically higher values. In order to lure investors in, promoters often seek valuations equal to four times (4x) or more of its original purchase price. If fulfilled, this would provide investors with a tax deduction equal to four times their original investment, so that high-tax bracket doctors would get all their money back (and more) in the very first year.
Why You Should Avoid Syndicated Conservation Easements
In most cases these syndicated conservation easement investments fail to have any economic substance. The promoters claim the land is purchased with the intent of building a resort or other high-end real estate development. Unfortunately, the truth is the land is simply purchased with the intent of generating excessive income tax deductions through inflated appraisals. Without the sky-high valuation, investors would never receive a tax deduction greater than their contribution and would in all likelihood end up losing money on their investment. Unfortunately, many doctors have been lured into these investments since they were offered or “sold” by their CPA firm, lending credibility to them.
Doctors who have participated in these conservation easement investments can expect the IRS to send them a settlement offer. Although this offer is typically only a small percentage of the original deductions claimed, we would recommend taking it in order to avoid additional penalties, interest, and taxes, plus huge legal fees if you choose to fight this uphill battle in U.S. Tax Court.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
Copyright © 2021 John K. McGill & Company, Inc.