The IRS' Dirty Dozen: 12 Tax Scams to Avoid in 2022

4. Monetized Installment Sales

These transactions involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans.

Here’s how a typical transaction works: A seller enters into a contract to sell appreciated property to a buyer for cash, and then supposedly sells the same property to an intermediary in return for an installment note. The intermediary, in turn, then purports to sell the property to the buyer and receives the cash purchase price. Through a series of related steps, the seller receives an amount equivalent to the sales price — less various transactional fees — in the form of a purported loan that is nonrecourse and unsecured.

The IRS cautions taxpayers who have engaged in any of these transactions or are contemplating doing so to carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits. It says taxpayers who have already claimed the supposed tax benefits of one of these four transactions on a tax return should consider taking corrective steps, such as filing an amended return and seeking independent advice.

Where appropriate, the IRS says it will challenge the purported tax benefits from the transactions on this list and may assert accuracy-related penalties ranging from 20% to 40%, or a civil fraud penalty of 75% of any underpayment of tax.

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