Abusive tax shelters are transactions promoted for the promise of tax benefits with no meaningful change in a taxpayer’s income or assets. It is a tax shelter that somebody claims illegally to avoid or minimize taxThese transactions typically have no economic purpose other than reducing taxes with predictable tax losses or tax consequences. Abusive tax schemes may involve the use of multiple layers of domestic and foreign pass-through entities such as Trusts, Partnerships, S-Corporations, and Limited Liability Companies.
When people use abusive tax shelters, they take advantage of this system of deductions. Some common examples of abusive tax shelters include overvalued property, or the use of offshore bank accounts to conceal income. In some cases, consumers use an abusive tax shelter unwittingly, often because they are encouraged to do so by a company which may profit from the practice. In the United States, there is a long history of abusive financial transactions which are designed to defraud the IRS, and often to defraud consumers as well.
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.