taxes

Beware these 'dirty dozen' tax scams that can cost you big and even land you in jail

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Abusive tax shelters
Abusive tax shelters | Tetra Images/Getty Images

Abusive tax shelters

For the third year in a row, abusive micro-captive insurance tax shelters make the list of the IRS' dirty dozen tax scams.

Here's how they work: Businesses are generally allowed to create captive insurance companies to protect against certain risks. The insured business claims deductions for insurance premiums, which are paid to a captive insurance company owned by the insured or by related parties.

With abusive micro-captive structures, accountants or wealth planners persuade business owners to participate in schemes that are off the mark. For instance, the coverage may insure "implausible risks, fail to match genuine business needs or duplicate the taxpayer's commercial coverages," according to the IRS. Premium amounts may be overpriced.

Trusts set up for the purpose of wealth transfer also can fall into this category. Trusts can be valuable legal arrangements to deal with many complex family, financial and tax issues. However, trusts designed solely to hide assets from the IRS are illegal.

Trusts can be complicated, so don't take the word of a stranger offering to set up one that will reduce your tax bill. Find an attorney or other trained tax professional who can help you establish a proper, legal trust.

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