As IRS Targets Illegal Tactics, Advisers Push Approaches That Are Less Aggressive

The Treasury department, along with many states, has started to crack down on bogus tax shelters that are robbing the U.S. of billions of dollars per year in tax revenue. As a result, tax advisers are marketing less risky strategies for tax savings including restricted management accounts, family limited partnerships, and exchange funds.

Tax shelters are defined as transactions with no real business purpose other than dodging taxes. Among the shelters being targeted are layers of trusts created to conceal income, credit cards drawing on offshore accounts, and exotic financial-market transactions that create artificial losses to offset taxable income.

Chicago tax partner David Handler commented on a tax-savings technique that he helped develop, the restricted management account or RMA, which places limits on an investor's control by creating an agreement with a bank or trust company that gives the financial institution total discretion in investing the assets. Although some experts feel that RMAs could face legal challenges down the road, Handler argued that the accounts should be safe because an independent third party has control of the assets. He added the RMAs are truly an "arm's length" transaction.

This article appeared in its entirety in the April 1, 2004 issue of The Wall Street Journal.