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Abusive Tax
Shelters
1. What is a tax shelter?
A tax shelter is a legal method taxpayers can use
to reduce tax liabilities. Tax shelters are used
to describe some of the tax advantages of real
estate investment, such as deductions for
depreciation, interest, and taxes, which may
offset the investor's other ordinary income to
reduce overall tax payment.
2. I am
considering a tax shelter investment. How can I
recognize an abusive tax shelter?
The IRS allows some tax shelters, but will not
allow a shelter which is abusive. An abusive
shelter generally offers inflated tax savings,
which are greater than your actual investment
placed at risk. Generally, you invest money to
generate income. However, an abusive tax shelter
generates little or no income, and exists solely
to reduce taxes unreasonably. A series of tax laws
have been designed to halt abusive tax shelters.
Any person participating in an abusive tax shelter
may be penalized up to $1,000, in addition to
being liable for the full tax irrespective of the
shelter.
3. What is an
abusive tax shelter?
Abusive tax shelters are marketing schemes that
involve artificial transactions with little or no
economic foundation. Generally, you invest money
to make money. Abusive tax shelters offer:
- Inflated tax
savings based on large write-offs and credits
that are usually out of proportion to your
investment.
- Little risk
despite outward appearances.
4. How do I know
if I am at risk?
You are considered at risk for abusive tax shelter
activity for the following amounts:
- The amount of
cash you invested in the activity
- The adjusted
basis of other property you contributed to the
activity, and
The amount you
borrowed to invest in the activity, to the
extent that you are personally liable on the
loan or have pledged property not used in the
activity as security.
Losses and
credits from tax shelters are often considered
passive. Passive losses and credits can only be
used to offset income from other passive
activities.
5. What is a
Listed Transaction and what does it mean to me?
IRS regulations on abusive tax shelters provide
that a taxpayer must disclose certain transactions
know as "listed transactions" by filing
a disclosure statement with its tax return. A
listed transaction is a transaction that is the
same as or substantially similar to one that the
IRS has determined to be a tax avoidance
transaction.
6. My tax shelter
promoter gave me a legal opinion stating that this
tax strategy should withstand IRS scrutiny. Does
this protect me?
The vast majority of shelters come with legal
opinions stating that there is substantial
authority for the tax strategy. These opinions are
used as a marketing device and are touted by the
promoter as a means of escaping penalties in the
event the IRS challenges the shelter. Many of the
opinions either misstate the strategy or contain
assumptions, caveats or qualifications that make
the opinion essentially meaningless.
7. What is my
remedy against the promoter?
Possible remedies include:
- back taxes
- penalties
- interest
- return of your
investment
- return of all
costs or fees paid to the promoter
- restitution
for any damages
- reimbursement
of attorney's fees
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