Should you consider forming an entity?

IRS Web Site Warns of Abusive Tax Shelters

Abusive Tax Shelters http://www.irs.gov/individuals/content/0,,id=96974,00.html

"If the promotion you are considering sounds too good to be true it may be an abusive tax shelter, look to see if any of the following red flags exist. Never pay taxes again Deduct the cost of your personal living expenses Deduct the cost of your child's education The IRS doesn't want you to know about this The statement, "The IRS doesn't want you to know about this", is often used by those selling abusive tax shelters to convince you that what they are selling is legitimate in spite of what you may hear from the IRS. If you don't trust the IRS, ask a tax professional that you do trust who is not involved in the marketing of tax shelter schemes. This is so new, your CPA doesn't know about it yet This is something said by promoters to discourage you from seeking advice from someone else about a proposed investment. While new laws are passed often, if there is a new one that could save you taxes, the promoter of the investment should encourage you to get a second opinion and provide a reference just in case your CPA really doesn't know about it yet. If the investment can't stand being looked at by an unbiased third party, it is probably one you want to avoid. Multiple trusts, partnerships or other entities are involved The existence of multiple levels of entities does not necessarily mean there is anything wrong with the investment if there is a business purpose for each of the entities. Be wary of schemes that use multiple levels of entities with no apparent business purpose other than reducing taxes and making the money hard (but not impossible) to trace. Some of the entities involved are foreign

http://www.irs.gov/prod/forms_pubs/pubs/p5500201.htm Abusive Tax Shelters

some excerpts from the above IRS publication:

"Abusive tax shelters are marketing schemes that involve artificial transactions with little or no economic reality. They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or the mischaracterization of the substance of the transaction."

"you should ask the following questions, which might provide a clue to the abusive nature of the plan. Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States-source income through foreign corporations incorporated in a tax haven and owned by United States shareholders?"

"Penalties: Investing in an abusive tax shelter may be an expensive proposition when you consider all of the consequences. First, the promoter generally charges a substantial fee. If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20% accuracy-related penalty, or a 75% civil fraud penalty. You may also be subject to the penalty for failure to pay tax."