New IRS Regulations May Address Monetized Installment Sales

 Posted on September 29, 2023 in Taxation Law

Because of the complicated nature of the tax laws in the United States, there are many methods taxpayers may use to reduce the amount of taxes they are required to pay. While some of these methods are legitimate, there are others that the IRS has identified as abusive tax schemes that could potentially lead to penalties for tax avoidance. Monetized installment sales are one method that has recently been identified by the IRS as a possible form of tax fraud. 

Taxpayers who engage in these types of transactions could face tax audits or investigations by the IRS. Those who need to respond to IRS queries or determine their requirements for reporting transactions should consider working with an attorney who can provide guidance on the applicable tax laws and regulations.

Monetized Installment Sales May Be Considered Listed Transactions

In a monetized installment sale, a seller who has agreed to sell property to a buyer for cash or in exchange for other assets will work with an intermediary to create an installment payment arrangement in order to defer the taxable gain from the sale. Typically, the seller will transfer the property to the intermediary, who will then transfer the property to the seller in exchange for payment. The seller will then obtain a loan from a lender in the amount of the property’s purchase price, and they will accept payments from the intermediary, which will be used to pay the interest on the loan. A balloon payment will be received at the end of the installment agreement, and the gain recognized from the sale of the property will be deferred until this payment is received.

With these types of transactions, a seller may report a cash sale of property as an installment sale on their income tax return, even though they received the proceeds of the sale through the loan. While fees will be paid to the intermediary and the lender, these will often be substantially smaller than the amount the seller is able to save on taxes by deferring the gain on the sale of their property.

According to the IRS, these types of transactions may be considered abusive tax schemes, since the intermediary in a monetized installment sale has no purpose other than to hold property temporarily and establish a payment plan in order to provide the seller with income tax deferral benefits. Because of this, the IRS is proposing new regulations that will treat monetized installment sales as listed transactions that must be disclosed. Failure to properly disclose monetized installment sales could result in substantial penalties. Sellers who use these types of arrangements may be taxed as if they received the full amount of payment at the time the property was transferred to the buyer rather than a transaction being taxed as an installment sale.

Contact Our San Jose Tax Lawyer

If you are unsure about how the IRS’s proposed regulations may affect you, or if you are concerned about potential penalties related to certain types of transactions, John D. Teter Law Offices can provide legal guidance on how to address these issues. Our San Jose, CA tax law attorney will work with you to defend against claims that you have committed tax avoidance or tax evasion, and we will advise you on the best steps you can take to avoid or minimize potential penalties. Contact us today at 408-866-1810 to arrange a consultation and get the legal help you need.