Abusive tax shelter

An abusive tax shelter is an investment arrangement that claims tax deductions considered by the IRS to be illegal. These shelters may engage in any of the following arrangements:

  • Inflated appraisals
  • Losses on nonrecourse loans
  • Mischaracterization of the substance of a transaction
  • Mismatched income and deductions
  • Unrealistic allocations
  • Unusual financing techniques

These arrangements commonly route invested funds through partnerships or trusts. An abusive tax shelter has no economic purpose; it exists solely to reduce the income taxes of investors. 

When this type of arrangement is declared illegal, investors are liable for back taxes, penalties, and interest charges.