IRS Gets Tough on Monetized Installment Sale Deals
The Internal Revenue Service (IRS) and the Treasury Department are cracking down on certain monetized installment sale transactions that have been identified as potentially abusive tax evasion techniques.
These transactions have garnered attention as a prevalent tax scam, prompting the IRS to take swift action in combating the issue.
To address this growing problem, the IRS issued proposed regulations on Thursday, classifying these transactions as “listed transactions” that must be reported to the IRS.
By designating them as such, the IRS aims to increase transparency and deter individuals and entities from engaging in these potentially fraudulent practices.
Failure to comply with the reporting requirements could result in penalties for both participants and their advisors.
Monetized installment sale transactions involve the sale of appreciated property, where a third party acting on behalf of the seller finds a buyer willing to acquire the property in exchange for cash or other assets.
Under this arrangement, the seller agrees to sell the property to an intermediary and receives an installment obligation in return.
The intermediary is then responsible for making interest payments to the seller over time.
One of the key advantages of these transactions is that they allow sellers to defer recognizing the entire gain from the sale upfront, spreading it out over the course of the installment payments.
However, in recent years, unscrupulous promoters have exploited this mechanism, marketing “monetized installment sales” that promise sellers the benefits of installment sale treatment while providing them with access to most of the cash proceeds upfront.
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IRS Targets Questionable Tax Practices with Listed Transactions
These questionable practices have raised red flags with tax authorities and have become a growing concern.
As a result, the IRS has deemed it necessary to take a proactive approach to curb these potentially abusive practices.
By categorizing these transactions as “listed transactions,” the IRS aims to deter taxpayers from participating in such schemes and increase oversight to prevent tax evasion.
The proposed regulations are part of the IRS’s broader efforts to combat tax fraud and evasion, particularly in light of evolving financial practices and emerging tax avoidance techniques.
By addressing these issues head-on, the IRS seeks to uphold the integrity of the tax system and ensure that all taxpayers fulfill their obligations in a fair and transparent manner.
To address the concerns surrounding these transactions, the IRS released a Chief Counsel Advice Memorandum (CCA 202118016) explaining why monetized installment sales should not be respected for income tax purposes.
The memorandum serves as guidance to taxpayers and tax practitioners, clarifying the IRS’s stance on these potentially abusive tax schemes.
By designating monetized installment sale transactions as “listed transactions,” the IRS aims to increase transparency and deter potential participants from engaging in these tax dodges.
Those involved in such transactions, including the sellers and their advisors, will be required to report their involvement to the IRS to avoid penalties.
This move sends a clear signal that the IRS is committed to enforcing tax compliance and safeguarding the integrity of the tax system.
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Source: Accounting Today
