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Frequently Asked Questions

What is an abusive tax avoidance transaction?

Transactions promoted for the promise of tax benefits with no meaningful change in the taxpayer's control over, or benefit from the taxpayer's income or assets. These are transactions that typically have no economic purpose other than reducing taxes.

Why are abusive tax avoidance transactions used?

Taxpayers illegally shelter income from income tax for several reasons but generally the most common use of abusive tax shelters is to inappropriately avoid paying federal and state income tax on large gains from specific transactions.

How do you know if you participated in an abusive tax avoidance scheme?

There are a variety of tax avoidance schemes and some are being promoted for several thousands of dollars. Here are some important questions that may indicate an abusive tax scheme:

    1. Is the tax loss, deduction, or credit a significant amount and used to offset income from unrelated transactions?
    2. Is the taxpayer's economic and out-of-pocket loss minimal compared to the tax benefits realized from the transaction?
    3. Does the transaction lack a business purpose other than the reduction of your income taxes?
    4. Does the transaction lack a reasonable possibility of making a profit?
    5. Are multiple entities involved to unnecessarily complicate the transaction?
    6. Does the tax position ignore the true intent of relevant statutes and regulations?
    7. Does the transaction produce a tax result that is too good to be true?

What is the Department doing to address abusive tax shelters?

    1. The Department has signed a Memorandum of Understanding (MOU) with the Internal Revenue Service. This allows an exchange of information with IRS related to participants of abusive tax schemes and promoters engaged in selling abusive tax shelters.
    2. The Department has signed a Memorandum of Agreement (MOA) with the Federation of Tax Administrators. This agreement allows the participating states to share a database, audit techniques, procedures and guidelines related to abusive tax avoidance schemes.
    3. The Department will be referring cases to the Criminal Investigation Section and the IRS Criminal Investigation Division.
    4. The Department has been working with the Legislature to create new tools to combat abusive tax schemes.
    5. The Department has created a unit that conducts abusive tax shelter audits and promoter investigations.
    6. The Department will be following the IRS compliance initiatives to the extent allowed under Arizona law.
    7. The Department will continue to educate tax practitioners and taxpayers to the hazards of investing in abusive tax schemes.

What is the Internal Revenue Service MOU?

The MOU is an agreement between the Department and the Internal Revenue Service Small Business and Self-Employed Division that will allow the exchange of information between the two agencies and avoid duplication of efforts. The agreement allows both agencies to maximize federal and state resources by working together to share training, tax returns and other information related to numerous abusive tax schemes.

What is the Federation of Tax Administrators MOA?

The MOA is an agreement between approximately 40 states to share information about abusive tax schemes. The MOA allows the exchange of information concerning participants, training materials, and other information related to abusive tax shelter schemes. The benefit of the MOA include efficient use of states’ resources, allows states to reach more taxpayers participating in abusive schemes, conduct joint compliance activities, and share more information related to specific tax schemes.

Is the Department auditing returns or waiting for the Internal Revenue Service to conduct an audit?

Since resources are an issue for both agencies, the Department is working closely with Internal Revenue Service to identify and develop potential audits that do not duplicate Internal Revenue Service audits. In addition to receiving audit leads and audit results from the Internal Revenue Service, the Department will be sharing audit results and leads with the Internal Revenue Service.

Is the Department auditing tax return preparers or promoters of abusive tax schemes?

The Department will pursue abusive tax shelter leads, audit and conduct criminal investigations of investors, tax return preparers and promoters associated with abusive tax schemes.

How do I report abusive tax shelter activity?

If you suspect or know of an individual or company that is not complying with the tax laws, report this activity to the Department’s Tax Shelter Unit or Criminal Investigation Section. Reports can be made by email, phone, mail or your local walk-in office.

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