An "abusive tax shelter" is a marketing scheme that involves
tax transactions
with little or no economic value. People invest money to make money. An abusive tax
shelter offers you inflated tax savings on your tax return based on large tax write offs and
tax credits. The tax write offs and tax credits on your tax
return are often
out of proportion to your investment. An abusive tax shelter exists solely to reduce
tax on your tax return, and thus there is no real economic benefit. A legitimate tax shelter exists to
reduce tax fairly and also produce income on your tax return. As in any investment, a real tax shelter
involves risks, while an abusive tax shelter often involves little risk, despite outward appearances.
An abusive tax shelter is often marketed in terms of how much you can
write off against tax on your tax return in relation
to how much you invest. This "tax write off" ratio is frequently much greater than
one-to-one. A series of tax laws have been designed to halt the write off of
abusive tax shelters on your tax return.Tax
shelter offerings are required to register with the IRS. The IRS assigns the tax shelter
an identification number. You must report the registration number on Form 8271
and this
Form must be
attached to your tax return if you report any income, tax deductions, or tax
credits from the tax
shelter.
Operators of tax shelters are required to keep a list of investors for seven (7) years
and provide the list to the IRS upon request.
The IRS may not pay your tax refund if the tax shelter claims on your
tax return are
questionable. Each IRS Service Center screens the tax returns of tax shelter investors to
determine the legitimacy of the tax deductible items on the taxpayer's tax return.
If you receive a letter from the IRS prior to filing your
tax return notifying you that you
cannot claim certain tax write offs from the tax shelter on your tax
return and you claim them
on your tax return anyway your tax refund
will be withheld by the IRS.
