What is an abusive tax scheme?
• The promise of tax benefits. • Predictable tax losses or tax consequences. • No related economic loss experienced with respect to the taxpayer’s income or assets. Who invests in abusive tax schemes? Individuals and business entities with large, constant streams of income or with substantial gains from one-time events may invest in abusive tax schemes. Why did abusive tax schemes become so common? Abusive tax schemes multiplied in the 1990’s for various reasons: • Taxpayers had large capital gains or other income subject to income tax. • Internal Revenue Service compliance activity decreased. • Promoters increased the marketing of abusive tax schemes as ‘legally defensible’ ways to minimize tax burdens. • Penalties for participating in abusive tax schemes were too small to have a deterrent effect. • There was no efficient disclosure and reporting system for abusive tax schemes.
