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 Wisconsin, as in other states, there are legitimate tax shelters that offer tax benefits to investors, which are legal and recognized under both federal and state tax laws. These can include investments in retirement accounts, real estate, municipal bonds, and certain business ventures that provide tax deductions or credits. However, abusive tax shelters are illegal. These schemes typically involve transactions that lack economic substance or are designed solely to evade taxes. The Internal Revenue Service (IRS) and the Wisconsin Department of Revenue do not recognize abusive tax shelters and engaging in such activities 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. It is important for investors in Wisconsin to ensure that any tax shelter they consider is legitimate and complies with both federal and state tax laws.