The IRS Dirty Dozen 2015, #9: Abusive Tax Shelters

Abusive tax shelters have made it again to the IRS annual “Dirty Dozen List.” The IRS is warning taxpayers to be wary of anyone trying to sell you into a complex scheme designed to avoid paying taxes. In this post, we will describe a few schemes that are currently on the IRS radar.

Complex transactions in general

The IRS warns taxpayers to be wary of promoters who promise to eliminate your tax liability through the establishment of multiple flow-through entities (including otherwise legitimate LLCs, LLPs, IBCs, foreign financial accounts and credit/debts cards). Know that any complex arrangement involving multiple transactions that are intended to hide your assets and income should be highly suspect. 

Questionable use of trusts

There are many legitimate uses of trusts. However, the number of questionable transactions utilizing trust instruments is on the rise and the IRS is now carefully scrutinizing many of these arrangements.  Extra scrutiny is being placed on the improper use of private annuity trusts and foreign trusts to (attempt to) deduct personal expenses, shift income, and avoid estate or gift transfer taxes.  

Captive insurance company abuse

A business can to exclude up to $1.2 million from taxable income by claiming deductions for premiums paid on insurance policies through a captive insurance company (I.R.C. section 831(b) “micro-captive”).  While the IRS certainly isn’t after captive insurance companies in general, it is looking for signs of abuse, including:

  • poorly drafted binders (e.g., insufficient or missing underwriting and actuarial substantiation)
  • coverage of implausible risks
  • exorbitant premiums

More red flags

The IRS is also paying particular attention to businesses that have traditional insurance to cover ordinary risks in addition to a micro-captive, or the combination of two or more structures of any kind that could in and of themselves be abusive.

Watch out for unsavory promoters

The IRS warns against tax scheme promoters who take advantage of taxpayers who do not understand tax planning vehicles by charging high fees for highly suspect arrangements. The IRS is investigating these promoters and the accountants and attorneys who assist or further abusive tax schemes.  

Competent tax planning for individuals and businesses

There are many ways of legally minimizing the impact of federal and state income tax liability. Seek the professional assistance of an established tax law and planning firm to assure that you are getting sound advice that will save – and not cost – money in the long-run.  For competent assistance in setting up a valid trust, captive insurance company or other tax planning vehicle contact the law firm of Moskowitz LLP

#10 on this year’s “Dirty Dozen” list of tax scams is Falsifying Income to Claim Credits, which will be the subject of our next post in this series.  

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