Abusive tax shelters are tax traps

Promoters of abusive tax shelters would like you to believe that they know tax tricks that your accountant doesn't know about and that the IRS doesn't want you to know about.

There are some attributes of tax shelters that should put you on your guard to avoid getting into a bad tax situation.  Here is a list of things to watch for:

• Nondeductible personal living expenses will not become tax-deductible by your transferring income or assets into a trust, partnership, or some other entity.

• Be suspect of multiple levels of entities or foreign entities that have no purpose other than to reduce taxes and make the money trail hard to follow.

• Look out for promises of tax reductions created by depreciating your home or other personal assets.

• Be wary of any scheme that purports to reduce or eliminate self-employment taxes.

Any tax reduction scheme that has little or no business purpose is probably inconsistent with the tax laws.  The IRS has no reason to hide tax provisions that are legitimate.  If the promoter offers a tax shelter that is perfectly legal, let him or her provide you with the IRS Code Section that governs the issue.  The promoter should encourage you to review it with your own accountant.

An unscrupulous promoter will often state that this is such a new provision that your accountant and attorney will not know of it.  Don't fall for this old sales pitch.  Being involved in a shady tax shelter can invite an IRS audit that you don't need.  It may also subject you to civil and criminal tax penalties.