If you’re looking for financial refuge, it’s best to avoid abusive tax shelters. While there are plenty of completely legitimate and credible forms of tax shelters, many individuals and tax scammers use exemptions, credits, and claims to cheat the IRS. There can be serious consequences when attempting to do so. With the weight of the federal government backing them, the IRS isn’t likely to let it happen so easily. If you wish to know how to avoid abusive tax shelters or you’re concerned about the consequences, keep reading for helpful information.

What is a Tax Shelter?

A tax shelter is a financial arrangement made to avoid or minimize taxes, and there are a number ways to go about doing it. The simplest example of a tax shelter is a student loan. Claiming deductions for student loans is a perfectly legal tax shelter. If you choose to pay for your college tuition with federal student loans rather than a bank loan or credit cards, you can qualify for a deduction on your returns. Charitable donations are another legal example. If you choose to make multiple donations every year and provide the IRS with the required documentation, you can write it off on your taxes.

How are Tax Shelters Abused?

Part of the drawback of a self-reporting tax system is that it can be easy to work the system—at least until you get caught. One of the ways in which people take advantage of tax shelters is by setting up a fake corporations to disperse annual income. Let’s say you’re an independent contractor and you make over $250,000 a year. If you were to establish a fake company that dispersed the $250,000 into five smaller payouts to your friends or family, who then give you the money back, that company would be considered an abusive tax shelter. Establishing a tax haven such as a fake company is considered to be a form of tax avoidance and tax evasion.

While it might seem simple for the IRS to recognize something as obvious as a fake company or charity, the IRS often lacks the resources to crack down on abusive tax shelters and it can take years before they do. However, this shouldn’t encourage you to try this strategy out. If the IRS finds you guilty of knowingly using and abusing a tax haven, there can be serious fines, penalties, and potential criminal charges.

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Tax Shelter Abuse Consequences

The IRS treats illegal tax shelters as fraudulent activity and can charge you a penalty that is 75% of the tax you underpaid as a result of your illegal tax scheme. If you or your business has been using abusive tax shelters or tax avoidance transactions for multiple years and the IRS can prove it, you can expect to be pay that 75% penalty for each year you falsely filed your taxes. If the offense(s) are bad enough, the IRS may also choose to pursue criminal charges and potential jail time for those involved.

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How to Avoid Tax Shelter Abuse

When it comes to the IRS, honesty is the best policy. As long as you provide the IRS with things like donation receipts, proof of student loan payments, and other listed transactions, you shouldn’t have much to worry about. The IRS provides abusive tax shelter regulations that anyone can read over if they wish to avoid being caught in a sticky situation.

The IRS takes tax avoidance and tax evasion very seriously. If you knowingly or unknowingly participated in any form of tax shelter abuse or tax avoidance transactions, contact a tax representative immediately—there are preemptive measures you can take to avoid criminal charges and penalties. A tax attorney may be able to negotiate and reduce your penalties during the audit process or a trial.

If you or your business are looking at potential penalties and fines from the IRS, don’t hesitate to contact Community Tax today. Our exceptional team of tax attorneys, CPAs, and tax professionals are standing by to assist you with any and all of your tax related needs. Don’t let tax penalties cripple you and your small businesses finances, call Community Tax today.