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Tax Shelter Investigations

Virginia Tax Lawyer Explains Abusive Tax Shelters

The federal government is serious about uncovering and stopping tax shelter abuses and schemes.  The IRS Criminal Investigation (CI) Division has created a national program focused on combatting these complex tax avoidance transactions.  Both investors and the individuals and entities that create, market and sell these schemes can face serious fines and penalties, including criminal prosecution and possible imprisonment. 

What Makes a Tax Shelter Abusive?

A tax shelter is a method or instrument designed to reduce or eliminate a person’s tax liability.  Tax shelters include a wide range of investments, strategies, transactions and other techniques that can be utilized to lower the taxpayer’s taxable income.  While many tax shelters are legitimate and perfectly legal, deceptive schemes and transactions that are used to purposefully evade income taxes are illegal. 

The IRS explains that abusive tax shelters and schemes often involve complex “multi-layer transactions.” These sophisticated transactions are designed to hide the true ownership of money by using multiple flow-through entities that receive and collect the money, including limited liability companies, international business corporations (IBCs), offshore financial accounts and other instruments. 

The IRS cautions taxpayers to consider whether something is “too good to be true” before making an investment or entering into any financial arrangements that claim to “eliminate” or “substantially reduce” income tax liability.  The IRS particularly notes that abusive tax structures often involve the misuse of trusts. While there are certainly many legitimate uses for trusts, the IRS explains that trusts tend to be used to facilitate questionable transactions that promise to reduce taxable income, inflate deductions, and reduce self-employment, estate and gift transfer taxes.  

What is a Tax Shelter Promoter?

Individuals and entities that promote, market, and sell abusive tax shelters are subject to significant civil fines and penalties.  Section 6700(a) of the Internal Revenue Code defines a tax shelter promoter to include any person who:

  1. Organizes (or assists in the organization of)  any plan or arrangement or participates in the sale of any interest in the plan or arrangement; and
  2. Makes or furnishes (or causes another person to make or furnish: (i)  a statement addressing the availability of any tax benefit arising from participation in the plan or arrangement that the promoter knows or has reason to know is false or fraudulent as to a material matter or (ii) a gross valuation overstatement as to any material matter.  

The IRS penalties for promoter abuses can be up to $1,000 for each activity, or if it is less, 100 percent of the gross income derived or to be derived from such activity.  In addition to these IRS civil monetary penalties, promoters of abusive and bogus tax shelters can also face criminal prosecution and potential time in prison.

Discuss Your Tax Related Concerns with Thorn Law Group

If you have questions about a tax shelter or have been targeted for a tax shelter promoter audit, contact the Virginia offices of Thorn Law Group by calling 703-752-3752 or emailing ket@thornlawgroup.com.  Thorn Law Group is an experienced tax law firm dedicated to protecting the rights of individual taxpayers, businesses and entities involved in complicated, high-stakes tax disputes.

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