The IRS is more empowered than ever by new regulations which allow it to curtail certain tax saving transactions from taking place. Economic substance, the regulation in question, requires tax strategies to have more than tax reason behind them; they must have economic feasibility, as well. As recently as 2006, the IRS gained $62 million more in taxes from one company transaction which did not pass muster with economic substance.
Tax Strategy Complexity
The IRS agency appears to be successful in winning the outcome in cases where tax packages have been designed in more general terms. One CPA firm ensured offsetting income by creating a complex structure that set tax losses into motion. Because it seemed to work, the firm hard-sold this structure to multiple clients. Each of these clients were subsequently penalized in additional taxes by the IRS later on, because the original strategy did not pass the economic substance test.
Life Insurance Strategies
The agency will allow other types of tax packages, even favoring those involving life insurance. How, then, do taxpayers benefit from transactions regulated by economic substance? Asset protection, estate planning, even additional income are several routes that can be explored; however, one must take into account all the variables and outcomes of tax strategies. There is more to them than simply how much savings to expect, in the end.