According to the IRS, "an ‘abusive tax shelter’ is a marketing scheme that involves artificial transactions with little or no economic foundation." With the Taxpayer Relief Act of 1997, Congress has introduced new regulations to curtail the abuse of the tax shelters that many businesses are involved in. This includes disclosure of money paid to outside firms for setting up tax shelters and the transaction of money. The businesses also have to include lengthy descriptions of the tax shelters and why they were created. Failure to do any of the above will result in heavy fines and penalties.
The IRS also requires that firms that create these tax shelters keep a list of all the investors and the amounts of the transactions. Many firms have been creating accounts overseas that act as tax havens because the investors don’t have to pay taxes on them. Firms are now required by law to disclose these accounts. As long as the money was made in the United States, Uncle Sam has the right to tax it. These firms have to acquire a tax shelter registration number and issue it to the investor. The investor then has to report it to the IRS on their tax return, using form 8271.
This doesn’t mean that the IRS will come after every tax shelter that exists out there. Giving money to charity or setting up charitable trust funds for your kids doesn’t mean that you will be audited for the money. Any amount over $100,000 that exists out there in a tax shelter that IRS deems as an account with financial benefits just to you needs to be disclosed to the government or you are looking at heavy fines.
