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 Maryland, as in other states, there are legitimate investments that offer tax benefits, commonly referred to as tax shelters. These can include retirement accounts like IRAs and 401(k)s, municipal bonds, and certain real estate investments that provide deductions and credits to reduce tax liability legally. However, abusive tax shelters are a different matter. These are typically complex financial arrangements designed primarily to avoid taxes rather than to yield a genuine economic return. Abusive tax shelters often involve contrived transactions that do not have a substantial purpose other than tax avoidance. The Internal Revenue Service (IRS) and Maryland's Comptroller's Office do not recognize these abusive schemes and actively seek to identify and penalize those involved. Taxpayers who participate in abusive tax shelters in Maryland may face substantial penalties, interest on unpaid taxes, and the possibility of criminal prosecution. It is important for taxpayers to ensure that any tax shelter they consider is legitimate and complies with both federal and state tax laws.