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 South Dakota, 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, municipal bonds, and certain 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 primarily designed to evade taxes. The Internal Revenue Service (IRS) and state tax authorities do not recognize abusive tax shelters, and engaging in such schemes can lead to significant penalties, interest on unpaid taxes, and the possibility of criminal charges. Taxpayers in South Dakota should be cautious and consult with an attorney or a tax advisor before engaging in any transactions that are promoted as tax shelters to ensure they comply with both federal and state tax laws.