Tax Law Term “Abusive Tax Shelter“
Any investment or device purchased by a taxpayer to reduce or defer taxes on income from other sources. Any entity, investment plan or arrangement of a type which the Secretary of the Treasury determines by regulations as having a potential for tax avoidance or evasion.
Abusive Tax Shelter is an investment scheme that claims to reduce income tax without changing the value of the user’s income or assets. Abusive tax shelters serve no economic purpose other than lowering the federal or state tax owed when filing. Often, these schemes channel funds through trusts or partnerships to avoid taxation. Investopedia
One of the ways in which people take advantage of tax shelters is by setting up a fake corporations to disperse annual income. Let’s say you’re an independent contractor and you make over $250,000 a year. If you were to establish a fake company that dispersed the $250,000 into five smaller payouts to your friends or family, who then give you the money back, that company would be considered an abusive tax shelter. Establishing a tax haven such as a fake company is considered to be a form of tax avoidance and tax evasion. CommunityTax