Abusive Tax Shelter
Definition
In the US, a financial arrangement (often involving complex transactions through a partnership or trust) that reduces liability to tax and is judged to have no legitimate business purpose beyond this. The Internal Revenue Service (IRS) publishes a list of transactions that are considered abusive; any taxpayer who makes use of such an arrangement, or one resembling it, may be charged for back taxes plus interest. In the UK the new General Anti-Abuse Rule similarly attempts to outlaw artificial and abusive tax shelters.
Example
Example 1:
A wealthy Abuja businessman sets up a fake partnership that exists only on paper to reduce his tax bill, the FIRS identifies it as having no legitimate business purpose and charges him back taxes plus penalties, similar to an abusive tax shelter.
Example 2:
A high-earning New York executive funnels income through a complex trust arrangement solely to avoid paying taxes, the IRS flags it as an abusive tax shelter and hits him with back taxes plus interest.