The Internal Revenue Service does not have authority over the qualified intermediaries who assist taxpayers with completing like-kind exchanges, exposing taxpayers to financial risks, according to a new report.
Under normal circumstances, when a taxpayer sells business or investment property, tax must be paid on the gain at the time of the sale. Qualified intermediaries receive and hold the proceeds of a sold property and then disburse the funds to acquire a replacement property, thereby deferring payment of the capital gains tax and saving the taxpayer a tax obligation.
The Treasury Inspector General for Tax Administration recommended in a new report that the IRS enhance the written guidance it provides to taxpayers by including information about the risks associated with using a qualified intermediary, including the possibility of the intermediary going bankrupt, and any alternatives to qualified intermediaries.
"In early 2008, IRS cautioned taxpayers about recent incidents of qualified intermediaries declaring bankruptcy or otherwise unable to meet their contractual obligations," said TIGTA inspector general J. Russell George. "As the number of like-kind exchanges more than doubled between tax years 2001 and 2005, we believe these defaults are further fallout resulting from the dramatic shift in real estate prices."
TIGTA found that the IRS does not have authority over qualified intermediaries. Although qualified intermediaries have important fiduciary responsibilities, they are not licensed or regulated, have minimal federal government oversight, and are not subject to minimum standards for training, competency or conduct. The IRS agreed with TIGTA's recommendations.
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