Seasonal tax evasion by doctors

Doctors are pitched a variety of tax planning schemes at the end of each year by both salespeople and well-meaning friends and colleagues. Here is a final look at some common tax evasion landmines physicians must be aware of. 

Like a bad penny or pumpkin spice lattes, tax scams come back every fall. Although there are always new ones to look out for, many traditional favorites are nearly guaranteed to make an appearance. Part one of this series on tax scams covered the basic requirements that any legal tax reduction plan must meet and your legal liability as the tax payer. Part two covered the current IRS "dirty dozen" tax scam list, and part three reviewed conservation easements, one of several higher-risk tax plans that doctors often suggest to each other. We will wrap up this series with a review of several other planning strategies that, even if legal when properly implemented, often end up being abusive and a liability by the way they are implemented. By all means do what the law allows to reduce your taxes, but it do it carefully and with professional guidance. 

Captive insurance companies (captives)

If creating a captive before year-end primarily for tax savings has been suggested to you by any advisor, be very careful. Just because “there’s still time to set it up” does not mean it’s a good idea that fits your fact pattern. I’ve covered captives in multiple previous discussions including both a look at how to determine if your practice qualifies for a captive and specific details of the legal and financial perils currently being faced by captive owners. It’s actually pretty simple: a captive is a risk management tool with “incidental” tax benefits. If the risks covered aren’t real, neither are the tax deductions. When solicited with sales materials, websites, and brochures that overtly emphasize tax planning over risk management, carefully reconsider who you are in business with. The government will be looking at those same materials. 

Opportunity zones–tax advantaged real estate investing

Your financially-informed friends may be talking about “opportunity zones” as the hot opportunity in real estate investing with tax benefits. As always, the IRS itself is a key source of info on the legal parameters. 

What is it? 

Opportunity zones were created to spur investment in distressed communities throughout the country by giving developers and investors tax benefits. There are nearly nine thousand communities designated as qualified opportunity zones and the IRS has a specific list. It’s a long-term play that makes your assets illiquid, so make sure you know all the details and that it fits your liquidity needs.

What are the benefits? 

• Investors may defer tax on almost all capital gain by making an appropriate investment in a zone.
• In the case of a capital gain experienced by a partnership and other pass-through entities the deferral can be taken by either the entity or the owner. 
• Investors who hold their investment for at least 10 years may qualify to increase their basis to the fair market value of the investment on the date it is sold.

Tax plans and life insurance

Despite the current fashion in the physician finance community to summarily dismiss it as the devil’s handiwork, life insurance is legitimately used by advisors to fund many tax and retirement plans. While properly structured life insurance can be an effective planning tool, there are very specific rules on how and when it can be used and even how it is purchased. A simple rule for any plan that heavily utilizes life insurance is the “rule of three”. If it “goes in” tax free  (as premiums, contributions, etc.), grows tax free, and then comes out tax free, be very careful and get a third-party opinion from your own advisors. 

You also need to know exactly what you are buying. There are significant differences between policy structures, benefits, and commissions paid to advisors that may affect what is recommended. Be sure you ask the right questions about every life insurance policy being proposed and get all the answers in writing from the insurance carrier in the form of a personalized, formal policy illustration with your name on it. Buying any policy on the basis of generic illustrations, or any promise or representation made outside the strict language of the actual policy, may end in disappointment. 

Attorney Ike Devji has practiced in the areas of asset protection, risk management, and wealth preservation law exclusively for the last 15 years. He helps protect a national client base with over $5 billion in personal assets that includes several thousand physicians and is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter.