Shelter From Tax Shelters
Tax shelters can be appealing. Who wouldn’t want to save a little money? But some "shelters" require you to give up control of your assets with the promise of significant financial gain.
When it comes to tax shelters, say experts, if it sounds too good to be true, it probably is. Often presented in the form of "trusts," many shelters have been held by the courts to be shams with no economic substance. The IRS annually audits numerous trust arrangements to see if they are legit and comply with tax codes.
Here are several "promises" offered by tax shelters that should raise red flags:
• "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.
• "Deduct the Cost of Your Home" – Personal living expenses cannot be transformed into deductible expenses simply by assigning assets or income to a trust or another entity.
• "Deduct the Cost of Your Child’s Education" – As with homes, these costs cannot be transformed into deductions.
• "The IRS Doesn’t Want You to Know About This …" – Abusive tax shelters are a one-way ticket to big trouble. The IRS will help you identify legitimate tax plans, or ask a professional tax person unrelated to such a shelter for an opinion.
• "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.
• Whenever Multiple Trusts, Partnerships or Other Entities are Involved – If the tax shelter uses multiple entities, there should be a logical and obvious business purpose other than reducing taxes and making the money hard to trace.
• If Foreign Entities are Involved – Be very wary of tax shelters that use foreign entities for no apparent purpose other than making 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 shelter. The IRS can be your best resource for tax shelter questions.