I know what you are thinking: I can’t count letters. But the truth is far worse. The IRS used the five-letter “F” word: Fraud.
The IRS recently released an IRS attorney memorandum addressing the application of the civil fraud penalty to a TEFRA partnership that engaged in a syndicated conservation easement. A copy of the October 5, 2020 memorandum is linked HERE and summarized in grimly detail below:
- Under TEFRA, the IRS determines the applicability of the 75% civil fraud penalty at the partnership level.
- That determination is based on the totality of facts and circumstances and whether they establish a willful intent to evade tax at the partnership level.
- The partnership’s conduct, including the partnership’s intent, is determined by looking to the conduct and intent of those managing the partnership.
- Relevant to this analysis, the IRS says, is the conduct of the promoters, promotional materials that promise a tax deduction 2.5X or more than the amount invested, and allegedly inflated appraisals that the IRS believes are “based on unreasonable conclusions about the development potential of the real property.”
- The civil fraud penalty, so determined, will then be directly assessed on the partners of the partnership through a notice of computational adjustment.
This last point is critical. By treating it as computational, the IRS may legally assess the 75% penalty and send the partner a bill without any consideration by the IRS of the partner’s circumstances, the partner’s motives, or the partner’s potential penalty defenses. If the partner wishes to contest the penalty, he or she will need to first pay the penalty in full and file a refund claim. The partner will not have the right to challenge the civil fraud penalty on a prepayment basis.
There is a not-so hidden IRS motivation here. The IRS is overwhelmed by the hundreds of Tax Court cases involving conservation easements, with more cases being added every day. In fact there were five new cases filed with the Tax Court just this week. The sheer number of cases is putting significant strain on IRS resources. When viewing the IRS memorandum through this lens, the memorandum appears to be an effort by the IRS to incentivize taxpayers to participate in the IRS’ global settlement initiative for conservation easements.
That being said, the fact that the IRS is using the “fraud” word in the context of a widely-available and highly-utilized tax planning opportunity should sound off the alarm bells for taxpayers and tax practitioners alike. In this already high stakes game, the IRS just upped the ante.
If you have any questions about this blog post or any other tax-related matter, please do not hesitate to contact me at (214) 749-2464 or firstname.lastname@example.org.