Tax shelters can beappealing. 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 financialgain.
When it comes to taxshelters, say experts, if it sounds too good to be true, it probably is. Oftenpresented in the form of "trusts," many shelters have been held bythe courts to be shams with no economic substance. The IRS annually auditsnumerous trust arrangements to see if they reflect economic reality and complywith tax codes.
Here are several “promises”offered by some tax shelters that should raise red flags:
• “Never Pay Taxes Again” –As long as assets or income are under an individual’s control, transferringthem to another entity does not remove tax responsibility.
• “Deduct the Cost of YourHome” – Personal living expenses cannot be transformed into deductible expensessimply by assigning assets or income to a trust or another entity.
• “Deduct the Cost of YourChild’s Education” – As with homes, these costs cannot be transformed intodeductions.
• “The IRS Doesn’t Want Youto Know About This …” – They already know. Abusive tax shelters are a one-wayticket to big trouble. The IRS will help you identify legitimate taxalternative plans, and ask a professional tax person unrelated to such ashelter for an opinion.
• “This is So New, Your CPAHasn’t Heard About it Yet” – Beware of turning over money to anyone whodiscourages you from seeking advice from an unbiased third party. A CPA willfind out about any new tax law that may benefit you.
• Whenever Multiple Trusts,Partnerships or Other Entities are Involved – If the tax shelter uses multipleentities, there should be a logical and obvious business purpose other thanreducing taxes and making the money hard to trace.
• Foreign Entities areInvolved – Be very wary of tax shelters that use foreign entities with noapparent purpose other than making money hard to trace.
Remember that the penalties,interest, and legal costs associated with an abusive tax shelter aresignificant – in addition to the tax due and fees you paid for the shelter. TheIRS can be your best resource for tax shelter questions.
– Source: Tire ReviewBusiness Toolbox
