What Constitutes an “Abusive” Tax Shelter?

  • Robert S. Thomas,
  •   Taxation
  •   Comments Off on What Constitutes an “Abusive” Tax Shelter?


Everybody wants to pay lower taxes, and there are many wise and legal ways to accomplish this goal. One of these methods is a tax shelter, which may include transactions or investment accounts that reduce a taxpayer’s taxable income. An example of a legal and popular tax shelter is a 401(k) plan, which reduces taxable income while creating a nest egg for the future. On the other side, there are methods of tax “evasion”, which are illegal attempts to reduce or conceal taxable income. This is where “abusive” tax shelters come into play.

Examples of Abusive Tax Shelters

An abusive tax shelter is a method of tax avoidance that is generally characterized by a reduction of taxable income with no other business or economic purpose. In other words, it is a transaction exclusively designed to reduce taxes. In recent years, the IRS has put a great focus on identifying abusive tax shelters. Examples of abusive tax shelters may include:

  • Insurance companies that offer insurance for “implausible” risks, are redundant of another insurance policy, or do not match any of a taxpayers actual needs.
  • “Son of Boss” schemes, in which a taxpayer falsely reports an inflated basis of a partnership interest in order to generate losses for tax reporting purposes.
  • Debt, trust, or partnership “straddles”, in which offsetting gains and losses are used to claim an improper “noneconomic” loss.
  • Confidential transactions, which are offered with some sort of confidentiality or non-disclosure clause and a minimum advisor fee is asked of the taxpayer.
  • Loss” transactions, which are specific types of claimed losses that set off red flags for the IRS.
  • Transactions that offer contractual protection against IRS action. In other words, if a business promises to offer a refund if the IRS rejects the tax incentive in the taxpayer’s return.

Abusive Tax Shelters are Illegal

In reality, there is sometimes a fine line between legitimate tax shelters and abusive ones. A rule of thumb is this: if it sounds too good to be true, it probably is and you should contact a tax lawyer before proceeding. There is good reason to be cautious: abusive tax shelters are illegal.

IRS Commissioner John Koskinen has stated that “Taxpayers should avoid unscrupulous promoters who encourage the use of phony tax shelters designed to avoid paying what is owed. These scams can end up costing taxpayers more in penalties, back taxes and interest than they saved in the first place.” There are many specific penalties in place regarding abusive tax shelters. Significantly, if a taxpayer intentionally or willfully engaged in an effort to evade paying taxes, they can open themselves up to criminal liability for defrauding the IRS.

An Attorney Can Help You

If you need assistance navigating the complex and intricate laws regarding tax shelters, give me a call. I have been a tax attorney for over two decades and have a Master of Law Degree (LLM) in Taxation, and a license to practice in the United States Tax Court. I can provide you with intelligent, accurate tax advice that will allow you to proceed legally and confidently. Contact The Law Offices of Robert S. Thomas at 847-392-5893 to schedule an appointment or visit our website today.

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