The Internal Revenue Service is offering a wide-ranging tax shelter amnesty and the deadline to get in on the deal is Monday.
Tax shelter. Just the name conjures up shady accountants and hidden bank accounts on tiny tropical islands. But tax shelters aren’t inherently illegal.
A tax shelter is anything that provides a tax benefit. Purchasing a home is a great tax shelter, since you get the tax benefit of deducting mortgage interest and real estate taxes.
But abusive tax shelters, well that’s different and, shall we say, problematic. In these cases, the whole idea is to evade tax.
I know, I said “Duh!” too. But the IRS says that these arrangements must have a legitimate business purpose. That means any deal you invest in must try to make money. If it cuts your tax bill along the way, all the better.
But if it’s set up simply to lower or eliminate taxes and there’s no way you’d put your money into it without the promise of huge tax write-offs, then it’s probably going to get whacked by the IRS.
For the last 2½ years the IRS has been targeting such schemes, or as Commissioner Mark Everson calls them, “flaky tax products.” So far, the agency has identified more than 4,000 taxpayers involved in 21 transactions the agency deems abusive.
The IRS now would like to put these deals to rest, once and for all. Last October the agency proposed a settlement to give participating taxpayers, individuals and businesses alike, in Everson’s words again, “a quick, quiet and cost effective way to put these deals behind them.”
The crux of the offer: Come forward by Jan. 23 and while you’ll have to pay all the taxes (plus interest) that you avoided with the shaky shelter, the IRS will, depending on the transaction, assess only a quarter or a half of its usual penalty for such financial finagling.
According to Tom Herman’s Tax Report in the Wall Street Journal (subscription required), tax lawyers predict a lot of taxpayers will jump at the IRS offer, “in part because of a little-noticed tax change … that could sharply reduce the amount of interest many shelter users would have to pay. That provision -- buried in what is known as the Gulf Opportunity Zone Act of 2005, which was designed mainly to help the Gulf Coast recover from hurricane devastation -- changed the rules for calculating interest on tax debts owed by individuals. In essence, the new law means many taxpayers who accept the IRS settlement offer could save large amounts of interest.”
Being of a preventative bent myself, I think the smarter move is to not get involved in one of these things in the first place. For tips on how to avoid buying into an abusive tax shelter, check out this story written last November in the wake of the KPMG shelter litigation.
TODAY’S TAX TIP: Are you expecting a tax refund without having to invest in a shady shelter? More importantly, are you sure you'll actually receive your refund check? A lot of people didn’t last year. Checks totaling $73 million came back to the IRS.
This time, though, it’s taxpayer, not IRS, error. The filers didn’t give the IRS their correct addresses. This tip explains how wrong mailing info can mean a lost tax refund and suggests ways to avoid such a hassle in the first place.
Bird in the house, not the hand: Bird watching is one of our hobbies. There’s nothing as pleasant as a walk in the woods (or swamp or grassland) on a nice day with birds chirping and soaring all around. The creatures never fail to put a smile on my face, even the one that was determined to roost in our house earlier this month.
Of course, neither the husband nor I put on our happy faces until we were finally able to evict the feathered interloper. But we did eventually smile about the adventure and the bird.
I’m pleased to report that our story was included in this week’s I and the Bird collection of tales from fellow birders. Click on over there and see what other blogging birders are up to.