NFIB

Watch Out for Tax Shelters With Red Flags
03/ 28/ 2002

Tax shelters have an appeal for all taxpayers. There are numerous legal tax shelters that call for acceptance of a give-up-some-control and save-some-tax money financial arrangement. Unfortunately, some of the tax shelters being offered to unsuspecting taxpayers use the lure of getting significant tax benefits without any change in control over or benefit from income or assets. If that sounds too good to be true, be assured that it is. Often presented in the form of "trusts," many arrangements have been held by the courts to be shams with no economic substance. The Internal Revenue Service (IRS) is presently auditing numerous trust arrangements to determine whether they reflect economic reality and comply with the requirements of the Internal Revenue Code. In today's Workshop, Edith Helmich examines seven tax shelters which could pose potential harm.

The IRS identifies seven red flag promises that should alert taxpayers to a possible abusive tax shelter:

1. Never Pay Taxes Again
   As long as assets or income are under an individual's control, transferring them to another entity does not remove tax responsibility.
2. Deduct the Cost of your Home
   Personal living expenses cannot be transformed into deductible expenses by assigning assets or income to a trust, partnership, or other entity.
3. Deduct the Cost of your Child's Education
   See (#2).
4. "The IRS doesn't want you to know about this..."
   This phrase is often used by those selling abusive tax shelters. In fact, the IRS will help you identify legitimate tax alternative plans. Ask a professional tax person who is not selling the plan for an opinion.
5. "This is so new, your CPA hasn't heard about it yet."
   Beware of turning over money to anyone who discourages you from seeking advice from an unbiased third party. A CPA will find out about any new tax law that may benefit you.
6. Multiple Trusts, partnerships or other entities are involved in the shelter
   If the tax shelter uses multiple levels of entities, there should be a logical and obvious business purpose other than reducing taxes and making the money hard to trace.
7. Foreign entities are involved.
   Be wary of tax shelters that use foreign entities with no apparent business purpose other than reducing taxes and making the money hard to trace.

Remember that the penalties, interest, and legal costs associated with an abusive tax shelter are significant (in addition to the tax due and fees you paid for the promotion). Answers to specific questions about tax shelters are available from the IRS at Tax Shelter Hotline.

Disclaimer: Before using this information or claiming deductions on a federal tax form, all documents and tax questions should be reviewed by a qualified attorney, accountant, or representative of the IRS.

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