Question:   I am considering a tax shelter investment. How can I recognize an abusive tax shelter?

Answer:   The IRS allows some tax shelters, but will not allow a shelter which is "abusive."

Tax shelters reduce current tax liability by offsetting income from one source with losses or deductions from another source.

An abusive tax shelter:

• Generally offers inflated tax savings which are disproportionately greater than your actual investment placed at risk. Generally, you invest money to generate income but an abusive tax shelter generates little or no income.
• Exists solely to reduce taxes unreasonably for tax avoidance or evasion. In comparison, a legitimate tax shelter often produces income and involves a risk of loss proportionate to the investment.
• Is often marketed in terms of how much you can write off in relation to how much you invest. A series of tax laws have been designed to halt abusive tax shelters.

There is current information on irs.gov covering abusive tax shelters including:

• Notice 2007-57 which covers Loss Importation Transaction
• The American Jobs Creation Act of 2004 which contains many provisions that will affect abusive tax shelters
• Information on “listed transactions” which gives information on 30 transactions which have been identified as tax avoidance transactions
• The Office of Tax Shelter Analysis