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 Utah, 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 under both federal and state tax laws. However, abusive tax shelters are a different matter. They typically involve complex transactions designed primarily to reduce taxes in ways not intended by the law. While they may appear to be legal investments, they lack real economic substance and are not recognized by tax authorities. The Internal Revenue Service (IRS) and Utah State Tax Commission scrutinize these transactions closely. Engaging in abusive tax shelters can lead to significant consequences, including the imposition of interest and penalties. In severe cases, individuals may face criminal prosecution for tax evasion or fraud. It is important for taxpayers to ensure that any tax shelter they consider is legitimate and complies with both federal and state tax laws. Consulting with a tax attorney can provide guidance on the legality and implications of potential tax shelters.