New on the dirty dozen? Installment sales

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Every year the Internal Revenue Service (IRS) releases its list of the “dirty dozen” tax strategies that are shaky to say the least. While they are not all “illegal” per se, they are the shelters and structures that often result in the most audits and the most issues once investigated.

While installment sales can be executed without flaws, the IRS now is warning that they’re cracking down on the ones that are potentially abusing the laws.

The IRS recently announced plans to add installment sales to the requirement for “listed transaction” reporting. This means both taxpayers and preparers will need to be ready to report more information when these transactions are present, or face fines.

Installment sale abuse has come in multiple forms, with the most popular including an intermediary who serves to help sellers avoid higher capital gains when selling assets with an appreciated value. The problem arises when sellers fail to recognize gain at the actual transfer in asset title.

Installment sales, especially with an intermediary often serving in a financing capacity, look on the outside as if title hasn’t transferred until the sale is complete. Similar to a mortgage, where title stays with the lender until the buyer has completed payments.

But in these instances, the seller is typically relinquishing title at the onset of the agreement as opposed to the end when the final payment is made.

In other words, improperly structured installment sales can result in improper gain recognition, leaving parties exposed to unforeseen tax consequences.

Tax preparers should make sure to ask appropriate questions about installment sales, or at the very least be asking your clients if they are partaking in or planning on an installment sale. The best tax planning strategies involve getting the facts up front to help your clients plan to manage gains and negotiate a good sales price up front.

Consider adding more questions to your tax organizers this busy season to dig a little deeper into potential installment sale agreements. While it is currently only proposed that installment sales be added to the listed transactions list, its prudent for tax preparers to start considering the consequences of them being added.

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