Are Legal Tax Shelters Simply Too Risky?
There is no doubt that the IRS is on the lookout for “tax shelters” or places that taxpayers can reduce their taxable income, ultimately resulting in a reduction in tax payments to the IRS. Some of these shelters are more risky than others, so you should be aware of the potential risks and make sure that you can back up the decisions you make on your annual tax return.
Legal Tax Shelters
Let’s be very clear – there are many legal shelters for your money…retirement plans, real estate, and health savings accounts, just to name a few. These are widely known to be above board and safe mechanisms to save you some tax dollars. As long as you abide by the normal rules and regulations, you will not draw undue attention to your tax return by utilizing these safe havens. In fact, the IRS encourages taxpayers to take advantage of these types of tax shelters.
Questionable or Illegal Tax Shelters
Other, more risky tax shelters may elicit more scrutiny from the IRS. With tax shelters, there is a very fine line between what is legal and what could be interpreted as tax evasion, which is against the law. Saving money in offshore banking accounts to avoid paying taxes on part of your income is probably the most notorious and illegal tax shelter.
One of the things that the IRS takes very seriously is your taxable income. Tax law prohibits a taxpayer from sheltering taxable income in an offshore account, or with another individual whose tax bracket (and thus tax rates) is lower than yours. While it may seem easy to add family members to your payroll to spread the income across the family, this is a red flag to the IRS. The general rule of thumb is if you are responsible for earning the income, then you should be the one earning the salary and paying the taxes on the full amount earned.
Potential Penalties and Resources
The penalties for entering into an illegal tax shelter can be severe. The IRS considers this offense fraudulent and the financial penalties can be up to 75% of the tax you underpay in addition to criminal prosecution and even jail.
If you are unsure about whether or not to move forward with a tax shelter or have questions about whether a certain tax shelter is legal or not, you should consider getting professional assistance. A tax firm can help you weigh the risks associated with a wide variety of tax shelters and help you determine if the risks outweigh the benefits.
Success Tax Relief has more than 30 years of experience advising clients on all types of tax issues, including audit preparation, routine tax preparation, offer in compromise and installment agreement applications and risk assessment. Tax shelters can be risky, so you will want to gather all necessary information and make sure that you have all back-up documentation that you may need should the IRS ask questions. You can get a free estimate for tax support from Success Tax Relief by contacting us today.