Financial Management
Steer Clear of Abusive Tax Shelters to Stay Off the IRS Radar By Wesley W. Lyon II, CPA, CFP®
T
he IRS recently released its annual “dirty dozen,” an annual list comprised of some of the most common tax scams and fraudulent schemes. Based on this list, I want to turn my attention to the four most common abusive tax shelters that target dentists.
Syndicated Conservation Easements A conservation easement is simply a deed or legal agreement between a landowner and a nonprofit organization or government agency that restricts the use of the land. In return, a landowner is allowed to take a charitable contribution deduction equal to the difference in value of land before and after the easement, so long as certain requirements are met. The key to this strategy is to ensure there is a difference in the value of the land, which causes many conservation easements to not be worthwhile. For example, if you purchase hunting land worth $800 per acre, but the land is still worth $800 per acre with a conservation easement in place since the land’s highest and best use is hunting, no charitable deduction will be granted. On the other hand, if a dentist purchases a lake home with 10 acres and decides they do not want neighbors, placing an easement on nine acres of the land could substantially reduce the value of the land since lake homes can no longer be developed. As with any good abusive tax shelter, the strategy is based on something that is perfectly legal and achievable. However, syndicated conservation easements use a few tricks to inflate valuations. In a syndicated easement, a partnership purchases land with the intent of maximizing charitable contributions for the partners. Once purchased, valuations are obtained in the form of greatly inflated appraisals that claim the land could be used for developmental purposes such as ski resorts, neighborhoods, etc., that would dramatically increase the value. The charitable deduction is then applied to the higher valuation, not the purchase price. However, these transactions lack economic substance and are a target of the IRS. Additionally, the IRS now limits the deduction to no more than 2.5 times the investors’ actual cash outlay.
taxable income. The money can then be invested at favorable tax rates or loaned out to the doctor to avoid taxes. However, most of these captives formed to save tax money instead of providing insurance benefits aren’t following the rules. Often, they are found to have excessive premiums in relation to the risks being insured against, and very few — if any — claims are ever paid out. These abusive captive insurance arrangements have been successfully targeted by the IRS previously, making their resurgence a bit surprising. Do yourself a favor, and avoid the excessive startup and management fees associated with tax deductions that will not stick if audited.
Micro-Captive Insurance Companies
Research and Development Tax Credits
A captive insurance company is a licensed insurance company formed by a business to provide risk mitigation services for its parent company or related entities. For example, some large companies decline going to market for health insurance and instead “self-insure” against their risk. This can be achieved by creating a captive insurance company that is typically administered by a larger insurance company. Many promoters of using a micro-captive insurance company sell dentists on the tremendous tax benefits that can be achieved by deducting insurance payments against practice income, since insurance companies do not need to claim premium payments as
Research and development (R&D) tax credits are paid to companies that meet certain requirements in order to stimulate R&D in the United States. The credit can be taken if four tests are passed to prove that the expenses relate to the elimination of uncertainty, are technological in nature, involve a process of experimentation, and have a qualified purpose to design a new process or improve a current process. Under these rules, some dental practices do qualify to take the R&D tax credit. However, as with the first two scams, the devil is in the details. While some practices have real research to improve a process or product, most do not. Furthermore, the tax credit is only
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AGD IMPACT
JUNE 2025