Abusive Tax Shelter

What is ‘Abusive Tax Shelter’

An investment scheme that claims to reduce income tax without changing the value of the user’s income or assets. Abusive tax shelters serve no economic purpose other than lowering the federal or state tax owed when filing. Often, these schemes channel funds through trusts or partnerships to avoid taxation.

Explaining ‘Abusive Tax Shelter’

People who invest in abusive tax shelters can be penalized by the Internal Revenue Service (IRS). Typically, when the IRS determines someone has used such a scheme, the person will owe back taxes with accrued interest.

To help taxpayers recognize potential schemes, the IRS has compiled a list of transactions that are abusive tax shelters. If a tax shelter resembles a listed transaction, it is considered abusive and the users may face penalties.

Further Reading

  • Abusive tax avoidance and responsibilities of tax professionals – www.tandfonline.com [PDF]
  • Sheltering Lawyers: The Organized Tax Bar and the Tax Shelter Industry – heinonline.org [PDF]
  • Lost in translation: Detecting tax shelter activity in financial statements – www.jstor.org [PDF]
  • The economics of corporate tax selfishness – www.nber.org [PDF]
  • Economic Substance: Drawing the line between legitimate tax minimization and abusive tax avoidance – heinonline.org [PDF]
  • When Good Preferences Go Bad: A Critical Analysis of the Anti-Tax Shelter Provisions of the Tax Reform Act of 1986 – heinonline.org [PDF]
  • Travails in tax: KPMG and the tax-shelter controversy – papers.ssrn.com [PDF]
  • Tax shelter activity: lessons from twenty years of evidence – www.jstor.org [PDF]