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 Kentucky, as in other states, there are legitimate investments that offer tax benefits, commonly referred to as tax shelters. These can include retirement accounts, real estate investments, and certain types of business investments that are designed to promote economic growth. These tax shelters are legal and recognized by both federal and state tax authorities. However, abusive tax shelters are a different matter. These are typically complex financial transactions that lack a genuine business purpose and are designed solely to evade taxes. The Internal Revenue Service (IRS) and Kentucky Department of Revenue do not recognize abusive tax shelters and engaging in such schemes can lead to severe consequences. Taxpayers involved in abusive tax shelters may face substantial penalties, interest on unpaid taxes, and the possibility of criminal charges. It is important for investors in Kentucky to ensure that any tax shelter they consider is legitimate and complies with both federal and state tax laws.