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IRS and U.S. Treasury monitor tax shelters for abuses

On Behalf of | Dec 4, 2023 | White Collar Crimes |

The tax system allows businesses and individuals in Michigan to reduce their tax obligations under certain circumstances. Most retirement accounts represent a legal means for you to set aside money tax free, but you may also encounter other financial arrangements labeled as tax shelters. Due to the potential for people to set up financial structures that run afoul of tax laws, the Internal Revenue Service (IRS) and U.S. Treasury monitor the professionals running these tax shelters and the transactions that take place around them.

Abusive tax shelters

Federal authorities may call a tax shelter abusive when it does not serve a legitimate economic purpose, like saving for retirement or college expenses. An entity creating its own small insurance company for itself could appear to be an abusive tax shelter. You and the financial adviser running the entity must report certain transactions to the IRS with Form 8886.2 to comply with regulatory oversight.

Reportable transactions:

  • Listed transactions
  • Confidential
  • Contractual protection
  • Loss transactions
  • Transactions of interest

The IRS examines these transactions to see if you are following tax laws. Examiners could interpret irregularities or other evidence of tax evasion as white collar crimes.

U.S. Treasury registration

Fund and asset management accounts acting as tax shelters require registration with the U.S. Treasury. This allows the federal government to observe the activities for compliance with tax law. The people running or selling interests in registered tax shelters must also register with the government.

Investigation and enforcement

You can expect an audit if the IRS Office of Tax Shelter Analysis (OTSA) detects suspicious transactions. You will need to supply additional information about the account’s activities and could be subject to tax penalties or criminal charges of tax fraud.