When people resort to illegal tax shelters with an aim to reduce the amount of tax to be paid, then these are treated as abusive tax shelters by Internal Revenue Service (IRS). Abusive tax shelters are used by people to hide the money by flowing it through various entities where it is stored hidden from IRS. Hence, IRS prosecutes heavily the abusers with its stringent rules to regulate the legal deductions. Even then people try to fool around through the use of abusive tax shelters. See some examples of transactions that are deemed to be abused often.
1. LILO Transactions
LILIO refers to Lease in/ Lease out transactions. These are basically lease agreements signed by the companies to transfer the deductions from a tax exempt business unit to a tax paying entity. This is done in the early years of the transaction in order to reduce the tax amount to be paid to the IRS.
2. Educational Expenses
Certain educational expenses done for your dependents can be deducted from the tax return as they come under tax deductibles. For example, tuition fee, enrollment fee, cost of books and other supplies of education, travel cost for attending seminars related to education and such things can be claimed for deductions up to a maximum of $4,000 based on your gross income. However, accommodation fee and other living cost of your dependent are non-deductibles. If you try to include these non-deductibles, then you are abusing the tax shelter.
3. Off-Shore Bank Account
When you have bank account outside of the US, it is an offshore bank account. Generally the details of the account holders are confidentially maintained by the bank and this secrecy is abused for evading tax by some people and corporations. People hide their assets and income by storing them in their offshore bank accounts so that their taxable income get reduced considerably.
4. Fraudulent Loans
At times, hidden money or assets are obtained through fraudulent loans; a loan is obtained from the international business corporation of the taxpayer. The loan amount get wire transferred to the US bank account with loan documents to make it appear legitimate. Such loans cannot be taxed and thus they evade tax amount due to IRS.
Getting Legal Advice
The IRS can impose hefty fines or even imprison you even if you have abused the tax shelters unknowingly. Taxing and deductions can become a headache when you do not understand the legal aspects clearly. Appoint a taxation lawyer for your company or have a consultation with the attorney in this regard so that you can avoid any legal action against you.
