Top 3 Abusive Tax Shelter Schemes-Avoid the IRS “Dirty Dozen”

Top 3 Abusive Tax Shelter Schemes-Avoid the IRS “Dirty Dozen”

The IRS has a “Dirty Dozen List” of tax evasion schemesi, and you do not want to get caught in one of them. It is rarely a conscious wish to scheme the system. For many unfortunate victims of penalties, it is getting the wrong advice from someone who can promise great benefits but is doing so with some “outside-the-box” strategies.

This article is not the list of the dozen, but another IRS document explaining three areas of abuse that could get you trapped if you are not carefulii. Just working with reputable and expert advisors and professionals is your greatest protection.

Trusts Abusive Schemes

Bank accounts in foreign jurisdictions have been a resource for evading taxation through abusive trust schemes. It is a thing of the past in many areas, as bank secrecy law changes are resulting in active examination of these schemes by the IRS.

Hiding the true ownership of assets or the disguise of the substance of transactions are the main attempts at tax evasion with trusts. Multiple layers of trusts and at times offshore shell corporations are used for these purposes. IRS requirements for the separation of responsibility and control of assets from the benefits of ownership are required but evaded through these schemes. The taxpayer continues to benefit illegally from the operation of the trust through:

  • False invoices.

  • Fees for services not performed or delivered.

  • Purchase and sale agreements and distributions that are not allowed.

  • False mortgages or rental agreements.

The IRS warns taxpayers to get advice and trust formation help only from recognized professionals and to carefully examine any promises of results that seem out of the realm of probability.

Micro-captive Insurance Shelter Schemes

The IRS is again using audits, investigations, and litigation to curb abusive micro-captive insurance tax shelters. Tax law allows businesses to create “captive” insurance companies to insure against business risks. The business is allowed to deduct the premiums paid for the insurance coverage. Reasons for these captive insurance arrangements include reduction in the cost of coverage and losses.

Further tax advantages are available to the captive insurance companies. They can elect to pay tax only on their investment income, not the premiums paid buy their owner business. The problems with this type of insurance when it comes to the IRS arise when those involved participate in schemes that lack the attributes of insurance. Also, businesses have been penalized for paying exorbitant premiums to their captive insurance companies to increase tax advantages.

Problems with Syndicated Conservation Easements

If taxpayers meet the criteria in the tax code and regulations, they may claim charitable contribution deductions for the fair market value of those conservation easements donated to qualified organizations. They can under certain circumstances deduct as a charitable gift property consisting of less than the donor’s entire interest in that property.

The problems arise when promoters of these conservation easements offer contribution deductions and tax savings that exceed the amount the donor has invested. They frequently do this by specifying a pass-through entity that owns real property or they form a pass-through entity to acquire real property. They then syndicate ownership interests with a promise of tax advantages far in excess of their contribution. Inflated appraisals of the conservation easement are also often involved.

Seek Advice and Services Carefully

How do you know who you can trust to keep you out of trouble? First, if you are offered this type of information about what to avoid, you know that the offeror is on the up-and-up. Trust reputable professionals in these important business and tax matters.

i IRS’s Dirty Dozen Scams – 2019 Edition,

ii Abusive tax shelters, trusts, conservation easements…,


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