We Represent High-Income and High-Net-Worth Taxpayers in IRS Abusive Tax Shelter Investigations
The use of abusive tax shelters by individual taxpayers can result in severe civil penalties as well as criminal prosecution. For many years now, the IRS has been aggressively pursuing individuals who use abusive tax shelters to evade taxes.
Tax Attorney Lawrence Brown has deep experience representing individuals who are suspected of using abusive tax shelters. Lawrence Brown is a former Trial Attorney with the Department of Justice Tax Division. His private practice focuses on resolving complex tax disputes including those related to abusive tax shelters.
When Is a Tax Shelter Considered “Abusive”?
Like many other complex tax mitigation strategies, there is nothing inherently unlawful about tax shelters. High-income and high-net-worth taxpayers can—and should—leverage various provisions in the Internal Revenue Code (IRC) and the IRS’s regulations to ensure that they pay no more than is legally required.
But, largely due to fraudulent tax shelters devised by unscrupulous promoters, abusive tax shelters have become a priority enforcement area for the IRS in recent years. The IRS added abusive tax shelters to its “Dirty Dozen” list in 2023 on the recommendation of the U.S. Government Accountability Office (GAO), which wrote in a report published in December 2022:
“Abusive tax schemes threaten our tax system’s integrity and contribute to the tax gap—the difference between taxes owed and paid. Often, abusive tax schemes are marketed by promoters and include complex, multi-layer transactions to attempt to conceal the true nature and ownership of the taxable income or assets.”
A tax shelter is considered “abusive” if its purpose is to allow a taxpayer to illegally evade or defeat any state or federal tax. At the federal level, tax evasion is a criminal offense that carries up to a $100,000 fine ($500,000 for corporations) and up to five years of federal imprisonment. If an abusive tax shelter investigation leads to allegations of wire fraud, money laundering or other federal crimes, the potential consequences can be far greater. Some examples of transactions that can trigger abusive tax shelter allegations and lead to charges for tax evasion and other federal financial crimes include:
- Confidential Transactions – Transactions in which the taxpayer’s identity is kept confidential can be classified as abusive tax shelters if they are executed for unlawful tax avoidance purposes. These transactions may come to light during promoter investigations—and this may in turn lead to identification and investigation of the taxpayer involved.
- Contractual Protections in Promoter Transactions – If a promoter offers the right to a refund in the event that the IRS disallows the tax benefit of a structured transaction, the IRS will generally consider this to be evidence of a potential abusive tax shelter.
- Listed Transactions – Listed transactions are transactions focused on tax mitigation that the IRS has determined to be abusive in many cases. Some examples of current listed transactions include: accelerated deductions for contributions to a defined contribution plan; debt straddles, stock compensation transactions, basis-shifting transactions, and lease-in/lease-out (LILO) transactions.
- Loss Transactions – Transactions that result in reportable losses under Section 165 of the internal revenue code can also be classified as abusive tax shelters in certain circumstances. For example, if an individual taxpayer claims losses of at least $2 million in a single tax year or $4 million in any combination of tax years, this will generally be viewed as a red flag for potential abuse by the IRS.
- Transactions of Interest (TOIs) – If the IRS determines that a transaction “ha[s] the potential for tax avoidance or evasion but lack[s] sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction,” the transaction may be flagged as a potential abusive tax shelter.
IRS Investigations Targeting Alleged Abusive Tax Shelters
Many IRS investigations targeting alleged abusive tax shelters begin in the IRS’s Office of Promoter Investigations. Established in 2021, the Office’s stated mission is to, “strengthen the IRS response to promoters and enablers of abusive tax avoidance transactions by detecting and ending the promotion, organization, and sale of abusive tax transactions.” But, the Office does not focus solely on identifying and targeting promoters. It targets taxpayers as well; and, in many cases, investigations targeting promoters will lead to scrutiny of promoters’ clients.
The IRS’s Criminal Investigation division (IRS CI) also plays an active role in uncovering alleged abusive tax shelters. IRS CI has several investigative tools at its disposal, and it often works in close coordination with both the Office of Promoter Investigations and the U.S. Department of Justice (DOJ). As a result, successfully defending against an abusive tax shelter investigation requires a coordinated and strategic defense, and this means that targeted promoters and taxpayers need highly experienced legal representation.
Request a Confidential Tax Shelter Defense Consultation at Brown, P.C.
To address any matters related to tax shelters with a highly qualified tax lawyer, contact Brown, PC at 888-870-0025 or e-mail the law firm through this Web site for legal counsel regarding any and all matters related to tax shelters. Our main offices are located in the Dallas-Fort Worth, Texas metroplex and we represent clients throughout the United States and the world.