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 Illinois, as in other states, there are legitimate tax shelters that offer tax benefits to investors, such as retirement accounts, municipal bonds, and certain real estate investments. These are legal and recognized by both federal and state tax authorities. However, abusive tax shelters are illegal. These schemes typically involve transactions that lack economic substance, are designed solely to evade taxes, and do not comply with tax laws. The Internal Revenue Service (IRS) and the Illinois Department of Revenue scrutinize these transactions closely. Participants in abusive tax shelters can face substantial penalties, interest on unpaid taxes, and the possibility of criminal charges. It is important for taxpayers to ensure that any tax shelter they consider is legitimate and complies with all applicable laws. Consulting with an attorney or a tax advisor is advisable when assessing the legality of a potential investment that claims to offer tax benefits.