Question:   How can I recognize an abusive tax shelter?

Answer:   Taxpayers can minimize their tax liability through legitimate investment, but they cannot invest in abusive tax shelters to minimize or eliminate their tax liability. 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 or capital appreciation but an abusive tax shelter generates little or no income or capital appreciation.
• Exists primarily to reduce taxes unreasonably for tax avoidance or evasion. In comparison, a legitimate investment produces income or capital appreciation 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:

• The American Jobs Creation Act of 2004 which contains many provisions that will affect abusive tax shelters
• Notice 2009-59 which contains a list of 34 transactions which have been identified as listed transactions which are a type of tax avoidance transaction
• Notice 2009-55 which contains a list of 4 transactions which have been identified as transactions of interest
• The Office of Tax Shelter Analysis