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 Colorado, as in other states, there are legitimate tax shelters that offer tax benefits and are recognized under both federal and state tax laws. These can include investments in retirement accounts, real estate, and certain business ventures that provide deductions and credits to reduce tax liability. However, abusive tax shelters are illegal. These schemes typically involve transactions that lack economic substance, are designed solely to evade taxes, and are not recognized by tax authorities. Engaging in abusive tax shelters can lead to severe consequences, including the imposition of interest and penalties by the Internal Revenue Service (IRS) and the Colorado Department of Revenue. Additionally, individuals involved in such schemes may face criminal prosecution. Taxpayers should 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.