IRS warns of abusive Form 2439 claims

The IRS is seeing an increase in abusive claims involving Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains. Filing a fraudulent Form 2439 claim includes overstated or fabricated undistributed long-term capital gains tied to entities that are not legitimate investment funds or valid real estate trusts. As enforcement activity increases, tax professionals can help their clients avoid concerns by carefully reviewing any return claiming this credit.

What is Form 2439?

Form 2439 is issued to shareholders of regulated investment companies (RICs) and real estate investment trusts (REITs) when those entities have undistributed long-term capital gains and pay tax on those gains at the entity level. The form is not issued by all investment funds or trusts only by RICs and REITs in these specific circumstances. 

The shareholder may claim a credit for the tax paid by the RIC or REIT on their behalf, but only to the extent that the shareholder is actually entitled to the undistributed long-term capital gain reported on Form 2439. The credit is not automatic for all shareholders; it must be supported by the actual Form 2439 and corresponding investment activity.

What is happening?

The IRS has identified abusive undistributed long-term capital gains claims, including:

• Overstated or fabricated Form 2439 credits 
• Claims tied to entities that are not legitimate investment funds or real estate trusts 
• False claims using the names of well-known organizations 

These are not simple errors. They indicate intentional misuse and are under increased IRS scrutiny.

Why it matters

For preparers, submitting unsupported credits may raise due diligence concerns and increase exposure to preparer penalties. This can also create additional headaches for your clients. 

Improper Form 2439 claims may result in:

• Refund delays 
• Audits 
• Penalties 
• Additional enforcement action 

Red flags

If something does not make sense, do not proceed without verification. Tax preparers are required to exercise due diligence under IRS regulations when preparing returns that claim credits, including those based on Form 2439. 

Watch for:

• Unknown or unverifiable issuing entities 
• Credits that do not align with the client’s investment activity 
• Missing or incomplete documentation 
• Clients unable to explain the source of the form 

Best practices

When reviewing Form 2439 claims:

• Confirm the issuing entity is a legitimate investment fund or real estate trust 
• Compare the form to brokerage statements or other supporting documents 
• Ask follow-up questions when information is unclear 
• Document your due diligence 
• Do not rely on appearance alone; even official-looking forms can be fabricated 

Practitioner scenario

A client provides a Form 2439 with a large credit tied to a well-known organization, but cannot provide supporting documentation. Further review shows that the entity is not a legitimate investment fund or real estate trust.

In this case, do not claim the credit. Request additional documentation and proceed only if the information can be verified.

Key takeaway

Unsupported credits can also trigger preparer penalties for tax professionals, not just consequences for clients. The IRS has specifically warned that abusive Form 2439 claims are under increased scrutiny and may result in audits, penalties, and enforcement actions for both taxpayers and preparers. 

Review every document to ensure the information provided is valid, especially when filing Form 2439. Schemes involving fraudulent claims like these can wreak havoc on your reputation, and your clients could face severe penalties as well.