Investments that yield tax benefits are sometimes called tax shelters and can be legal under federal and state laws. But abusive tax shelters are schemes involving transactions with little or no substance that are not recognized by federal and state taxing authorities and that may create taxpayer liability for interest, penalties, and possible criminal prosecution.
In Texas, as in other states, there are legitimate tax shelters that offer tax benefits to investors, such as investments in certain real estate, oil and gas partnerships, or retirement accounts. These are legal and recognized by both federal and state taxing authorities. However, abusive tax shelters are a different matter. They typically involve complex transactions designed primarily to reduce taxes in ways not intended by the law. While some tax shelter strategies may exist in a gray area of the tax code, abusive tax shelters are generally characterized by a lack of economic substance or a primary purpose of avoiding taxes. The Internal Revenue Service (IRS) and the Texas Comptroller of Public Accounts scrutinize these transactions closely. Taxpayers involved in abusive tax shelters in Texas may face penalties, interest on unpaid taxes, and potentially criminal charges. It's important for taxpayers to consult with an attorney or a tax advisor to ensure that any tax shelter they consider is legitimate and complies with both federal and state tax laws.
