An IRS office building in the East Harlem neighborhood of New York.
Timothy Fadek / Bloomberg via Getty Images
Last December, two Atlanta tax professionals pleaded guilty to a scheme that defrauded the IRS of more than $ 250 million in taxes.
The scam resulted in more than $ 1.2 billion in fraudulent charitable deductions through so-called syndicated conservation easements, a strategy most taxpayers likely have never heard of.
Congress created maintenance easement tax incentives to help promote land conservation. Property owners give up certain usage or building rights in order to keep the land as open space. In return, they receive a charitable deduction to compensate for the loss in value.
However, there has been an abuse of incentives targeting taxpayers looking for deductions. Individuals investing in the businesses may receive inflated valuations of the property, which then leads to higher tax deductions that are shared among a group of investors. Promoters of these deals usually promise big returns. In the case of the Atlanta tax experts, they pledged more than $ 4 in charitable tax deductions for every $ 1 invested with no “economic risk.”
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The IRS has stepped up efforts to address these abuses.
In recent years, the IRS has announced that it will step up its enforcement efforts related to syndicated conservation easements. “Ending these abusive schemes is a high priority for the IRS,” said IRS Commissioner Chuck Rettig.
The Atlanta Tax Professionals case marked the first Justice Department prosecution to involve maintenance easements. Further investigations are ongoing.
Despite efforts by the IRS to contain abuses, the total deductions claimed in recent years have skyrocketed, according to the Land Trust Alliance, a national land protection organization.
From 2010 to 2018, a total of $ 36 billion in deductions were made through these types of transactions. Notably, of that $ 22 billion arose even after the IRS notified bad actors in 2016 by citing certain syndicated conservation easements as tax avoidance measures.
“It’s just so outrageous, it’s mind-boggling,” said Lori Faeth, senior director of government relations for the Land Trust Alliance.
Now some congress leaders step in.
Recently a bill was reintroduced in the House of Representatives that would block charitable deductions of more than 250% of the amount invested in real estate with easements. The proposal, called the Charitable Conservation Easement Program Integrity Act, was introduced by Rep. Mike Thompson, D-Calif. An accompanying bipartisan bill was also introduced by Sens. Steve Daines, R-Mont., And Debbie Stabenow, D-Mich.
The aim of the bill would be to protect valid uses of the deduction, such as: B. Family businesses or ranches.
“This is just a small handful of bad actors who abuse the tax law,” Faeth said.
“[For] With any CPA, there are very obvious signs that they should stay away from these types of transactions, and they shouldn’t advise investors to invest in them, “she said.
In order to be able to participate in these transactions, individuals must have what is known as accredited investor status. An accredited investor is defined as someone with an income of at least $ 200,000 or net worth greater than $ 1 million.
The bill could help limit misuse of the technology and free the IRS to focus on other issues, Faeth said.
The proposal has strong support from both sides, she said, as it is a source of income. An earlier estimate by the Joint Tax Committee for another version of the bill was that it could produce $ 11.4 billion.
In the meantime, the government continues to crack down on the abuse of the withdrawal. The IRS urges individuals who have participated in an abusive syndicated conservation easement to work with an independent attorney to ensure compliance.
“The vast majority of these transactions are legitimate and ethical for the right reasons, but these handful of bad actors are misusing the incentive to help wealthy people get much, much richer,” Faeth said.
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