Beware of the Tax Shelter Promotion

No taxpayer is required to pay more than their fair share of taxes. This has been ruled into law many years ago. During the past twenty years practicing as a CPA and a certified financial planner in San Diego, I have had the privilege of working with many clients. Each has a goal of minimizing their annual tax obligation. The vast majority of financial planners and tax preparers are ethical and work with their clients in reaching their goals.

However, over the years I have seen many sales pitches being made to higher bracket tax payers to invest in tax shelters that go beyond the line. What is going beyond the line? It is when someone “invents” a theory that will not stand up in the light of day. It has little or no economic sense. It is said that it does not pass the smell test.

A couple of the tell-tale signs that you are being sold a bill of goods that is going to back fire on you include the following: a) you need to sign this memo/letter of confidentiality as this is a special proprietary strategy or product that has been developed at great cost to the promoters and they don’t want it copied; b) the IRS is changing the law next year, or at same rapidly approaching date so you need to sign up now. When you hear comments of this nature, you need to run from the scene of the potential crime ASAP. Actually, the crime, in the vast majority of the cases, when the deal sounds too good to be true is the fact that the deal will not hold up under the review of the IRS.

Over the many years I have had many offers from “financial advisors” to promote their products to my clients in exchange for a share of their sizable commissions. Fortunately, as a fee-only advisor and practicing CPA, I have never felt comfortable doing that, so I can maintain my independence when it comes to evaluating the suitability of an investment for a client.

Many doctors and dentists have been enticed into investing with a very large San Diego financial advisory firm that was established by a dentist turned financial advisor. Perhaps most of their recommendations were sound and logical for the specific and unique needs of their clients. Note, I refer to unique and specific because each client is unique and needs special attention. However, last month’s financial pages revealed the facts that $500,000,000 (like one half of a BILLION) of the firm’s assets were frozen by IRS and the passports of the principals were taken into safekeeping.

The two specific tax shelters mentioned in the news were the establishment of charitable trusts for self dealing and a transfer of taxable income into an off shore disability contract based in Barbados. If you find yourself a victim of a tax shelter that will not pass the smell test, you are in need of a totally independent source from those that got you into the situation to develop an exit strategy ASAP. Remember, tax avoidance is legal, good and provided by ethical advisors, but tax evasion is a crime and brings with it heavy penalties and possibly indictment.