Abusive tax shelter definition

What is an Abusive Tax Shelter?

An abusive tax shelter is an investment arrangement that claims tax deductions considered by the IRS to be illegal. An abusive tax shelter has no economic purpose; it exists solely to reduce the income taxes of investors. These arrangements are typically marketed by promoters and include complex, multi-layered transactions that are intended to conceal the true nature of a taxpayer’s income or assets. When this type of arrangement is declared illegal, investors are liable for back taxes, penalties, and interest charges.

Examples of Abusive Tax Shelters

Abusive tax shelters may engage in a variety of activities, such as the following:

• Inflated appraisals. For example, the promoter of a tax shelter obtains an inflated appraisal for a conservation easement and then donates the easement to a tax-exempt entity. Supposedly, investors in the shelter can then claim a charitable contribution based on the inflated appraisal.

• Losses on nonrecourse loans

• Mischaracterizations of the substance of a transaction

• Mismatched income and deductions

• Unrealistic allocations

• Unusual financing techniques.

These arrangements commonly route invested funds through partnerships or trusts.