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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 New York, as in other states, there are legitimate tax shelters that offer tax benefits to investors, such as retirement accounts (IRAs, 401(k)s), municipal bonds, and certain real estate investments. These are legal and recognized by both federal and state tax authorities. However, abusive tax shelters are a different matter. These are typically investment schemes that lack economic substance, meaning their primary purpose is to avoid taxes rather than to yield a genuine economic return. The IRS and New York State taxing authorities 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 prosecution. New York State, like the federal government, has laws and regulations in place to identify, penalize, and deter the use of abusive tax shelters. It is important for investors to ensure that any tax shelter they consider is legitimate and complies with both federal and state tax laws.

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Taxes

tax shelter

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Taxes

tax shelter

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