There’s Never Been a Better Time to Play the Tax Shelter Game
For Jeff Socha, illegal tax shelters are just a hazard of the job.
A financial adviser catering to entrepreneurs and other wealthy people, Socha is keyed into tax strategies that could help them save money. But he’s constantly dodging arrangements that are either bad deals or flat-out sketchy.
“We maybe come across one new thing a year” worth recommending to clients, said Socha, founder and CEO of Austin, Texas-based Socha Capital. “And I probably get pitched something once a week. The ratio is terrible.”
Selling tax shelters is a lucrative business. Promoters who pitch these strategies take between 5% to 30% of a client’s expected tax savings, wealth advisers said.
But promoters, unlike tax preparers, aren’t named on the tax returns of their customers. And whether the tax-cutting strategy they recommend is allowable can be an open question until the IRS weighs in, which can take years, even when the agency is at full strength.
Today, headcount at the IRS is down roughly 25% since President
A Treasury official said the IRS will remain tough on tax crime. And former IRS Commissioner Chuck Rettig said a big investment in AI could help the agency. But some former tax enforcement personnel said the time is ripe for those willing to test the government’s ability to prosecute tax scams.
“Most practitioners, if they are being candid, anticipate a significant dropoff in tax compliance,” said Rod Rosenstein, former principal deputy assistant Attorney General for tax enforcement in the Justice Department.
The ‘Audit Lottery’
Last year, IRS criminal investigations into abusive tax schemes referred to the Justice Department for prosecution dipped to a 10-year low.
“Tax shelter promoters are watching,” Democratic senators warned in January, asking the IRS to explain the sharp drop.
But by some measures a shift in enforcement was underway even before Trump’s return. Between 2022 and 2024, when President Joe Biden was in office, federal prosecutors filed the fewest number of criminal tax-related cases in at least 25 years, according to a Bloomberg Tax analysis of Justice Department data.
Historically, the threat of such criminal summons from the Justice Department has been the government’s strongest deterrent to prevent taxpayers from pushing the boundaries of the law.
“You need some significant risk so that people understand that when they violate the law, they will be prosecuted,” Rosenstein, now a Baker McKenzie partner, said in an interview. “Otherwise, people are willing to play a game called the ‘audit lottery.’”
The IRS didn’t respond to multiple requests for comment.
Lifecycle of a Shelter
Many Americans work with tax experts and money managers to navigate IRS rules and keep as much of their income as legally allowed. But those with a higher tolerance for risk can easily find promoters to recommend newer, often untested strategies that promise bigger savings.
Promoters advertise through wealth advisers and social media, but word of mouth is also a big driver, said Noah Rosenfarb, an accountant and founder of the wealth management firm Wealthrive.
“They’re telling their friends, ‘Hey, I did this thing. It worked out great, and you should do it,’” said Rosenfarb. “That’s how some of these seeds get marketed by the people that use them. It had the outcome they wanted at the outset.”
The IRS as of 2022 was investigating more than 40 illegal tax schemes pushed by some promoters, including improper claims of business research credits, syndicated conservation easements, and some micro-captive insurance arrangements.
It also publishes an annual “Dirty Dozen” list of emerging strategies or schemes taxpayers should avoid.
But many more strategies circulate beneath the radar of law enforcement, with new plans emerging every year, wealth advisers and former government officials told Bloomberg Tax.
“By the time the IRS is first able to launch a coordinated compliance effort aimed at certain transactions, thousands of returns have already been filed,” said Rettig, who ran the agency during the first Trump administration.
For tax shelter promoters, the ideal target to invest in a new strategy has a high tax liability but not enough wealth to hire a sophisticated team of tax planners, a client generally making a few hundred thousand to $1 million a year, according to wealth consultants. Many are in the economic range of doctors, dentists, and entrepreneurs.
Wealth advisers said taxpayers should avoid any strategy where promoters can’t point to a tax code section that authorizes the planning technique they’re advocating. Rushing taxpayers to buy, refusing to put details in writing, and requiring buyers to sign nondisclosure agreements are other red flags.
You’re Busted ... Sometimes
Federal criminal prosecutions of promoters are rare, and generally reserved for the most audacious and egregious schemes.
In 2024, accountant Jack Fisher and tax attorney James Sinnott were sentenced to 25 years and 23 years in prison, respectively, for their roles promoting illegal tax shelters that caused $450 million in federal tax losses. The pair pitched investors on a syndicated conservation easement strategy, which sold stakes in shell companies that acquired land with restrictions on the development rights. The parcels were later donated to charity at inflated values to yield $1.3 billion in fraudulent charitable tax deductions.
Other notable examples include the accounting giant KPMG, which entered a deferred prosecution agreement with the Justice Department for its sales of a suite of illegal tax products to wealthy clients in the late 1990s and early 2000s. Several senior tax managers of the accounting firm were convicted on criminal tax evasion charges and the firm agreed to pay $456 million in penalties.
In 2014, tax attorney and accountant Paul Daugerdas was sentenced to 15 years in prison for directing a fraudulent tax scheme that helped wealthy clients evade more than $1.6 billion in federal taxes. The convictions of Daugerdas and several co-conspirators led to the collapse of Jenkens & Gilchrist PC, a once-prominent Dallas-based law firm with more than 600 attorneys.
But typically it’s taxpayers, not promoters, who pay a price.
A Texas-based technology sales manager is facing IRS penalties for using so-called sovereign tribal tax credits, a nonexistent break that his accountant of four years recommended. The sales manager took out an $80,000 loan to buy the credits, thinking he’d pay it back with the tax refund.
“All I think about every waking hour is how much money I’m out,” said the sales manager, who was granted anonymity because of his intention to bring legal action. “It’s life-changing, the amount of money I’m out here. I think there’s a lot of other victims affected by this exact scheme out there.”
His accountant was part of a network of distributors for the sovereign tribal tax credits, which are sponsored by White River Energy Corp., and the subject of a criminal investigation. Greenspoon Marder LLP, which filed a suit against White River and its network, has been contacted by nearly 40 people who collectively paid tens of millions of dollars for the credits, said partner Brant Kuehn. More people reach out every week.
“While some could be considered high-net-worth individuals, most are ordinary families—small-business owners, doctors, salespeople,” Kuehn said. “The folks who have reached out to us so far come from more than a dozen states and worked with dozens of different accountants.”
The taxpayer bought the tribal tax credits after the Treasury Department told Bloomberg Tax the credits didn’t exist. But the IRS didn’t put the credit on its “Dirty Dozen” list that warns taxpayers of questionable transactions. And it didn’t seek authority to make the credits a “listed transaction” that would impose special reporting duties on the participating taxpayers.
The listed transaction reporting requirements intend to help with promoter enforcement, said Carolyn Schenck, a Caplin & Drysdale member who served as the national fraud counsel at the IRS until last year. Other tools include special reporting rules for material advisers and audits or injunctions focused specifically on promoters. But those cases are complex, and IRS criminal investigations historically focus on areas that have the highest deterrent impact.
“Our tax system is designed to assess taxpayers first, then investigate third parties separately if needed, after the fact,” Schenck said. “Not every outside influence is clearly a promoter in an abusive scheme-sense.”
Promoters can survive even when their clients are audited or targeted for prosecution. A constant across the industry holds that the next scheme is just around the corner.
“Promoters thrive in the gaps between civil enforcement and criminal investigation,” Schenck said. “When those gaps widen, compliance erodes.”
— With assistance from
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