Whether a tax shelter is risky or conservative, a person investing in one risks an audit by the Internal Revenue Service. And the IRS is becoming more aggressive in its pursuit of what it considers ''abusive'' tax shelters - generally shelters that provide tax savings far in excess of the amount invested.
''We are not backing down from our commitment to eradicate abusive tax shelters,'' declared IRS Commissioner Roscoe L. Egger Jr. in a recent speech outlining the IRS's new nationwide crackdown program. ''There is nothing legitimate about abusive shelters. They are phony financial ploys to make promoters rich and keep investors tax-free.''
Egger has estimated that the Treasury Department loses $3.6 billion a year from abusive tax shelters.
In prior years, the IRS would merely issue revenue rulings and focus on taxpayers who claimed a deduction or credit from an investment in an abusive shelter. Now, armed with a powerful new tool - the Tax Equity and Fiscal Responsibility Act - the IRS is going after the promoters themselves with court orders and injunctions and following through with the list of investors.
It has started a program of examining suspected abusive tax shelters before investors have filed their tax returns. If the IRS suspects a shelter offering may be improper, it will scrutinize the offering materials and other documents and talk to the promoters and their advisers. If the IRS concludes that the shelter is improper, it will write the investors advising them that, if they claim tax benefits resulting from the shelter when they file their returns, their returns will be audited and the tax benefits disallowed.
Investors, of course, have normal recourse to the courts. But the IRS hopes that the pre-filing notice will prevent many of them from claiming the benefits in the first place. The service has indicated that the pre-filing procedures will not be used for ordinary legitimate tax shelters even if it disagrees with some of the promoters' legal interpretations. They will be used only in cases where the IRS feels that the shelter is clearly improper.
Moreover, civil penalties now are more stringent. Under TEFRA, which took effect in September 1983, a taxpayer is subject to a nondeductible penalty equal to 10 percent of any tax deficiency. An exception is provided in most cases if either the issue presented by the deficiency is adequately disclosed on the return or if there is substantial judicial or administrative authority supporting the taxpayer's position.
The rules are stricter with respect to tax shelters, however, and disclosure on the return does not avoid the penalty. Not only must there be substantial authority for the taxpayer's position but he must demonstrate that he reasonably believed that his tax treatment of the item on this return was more likely than not the proper treatment.
Special penalties are imposed for tax deficiencies resulting from mistakes in valuations of property. Moreover, interest on tax deficiencies must now be computed daily instead of calculated on a simple interest basis. All of these changes have increased the risk for an investor who buys a tax shelter figuring that, even if he is audited, he will have the use of the government's money for a few years before the audit occurs.
Some abusive tax shelters have been dealt with effectively by IRS rulings or congressional actions and have virtually disappeared from the market. For example, the commodity straddle, formerly a popular shelter, has been curtailed by the Economic Recovery Tax Act of 1981. It has been replaced, however, by other shelter schemes ranging from growing jojoba beans to leasing and subleasing energy management devices.
William G. Brennan, publisher of Brennan Reports, a tax shelter newsletter, said that the IRS has been concentrating on such shelters as master recordings and engraved plates for producing stamps. They generate tax deductions mainly by grossly overvaluing the master print.
Recent rulings attack food storage containers, videodiscs, and accrued interest under what is know as the ''Rule of 78's'' - a method whereby an investor can deduct the largest amount of interest expense in the early years of a loan. As a result of rulings, food container programs have been shut down, but videodisc programs are still being offered.
The scheme involving the videodisc ruling operated in the following manner: The promoter arranged for the sale of the basic program on which cassettes and discs were to be made. He had been selling them to investors for $17,000 apiece. The investor put up $1,300 in cash with the remaining $15,700 payable through a note, which would bear interest at 8 percent and was due in 15 years.
In the following year, the investor was required to put up another $2,275, which was only a security for the note. The revenue earned from producing and selling the video cassettes and discs was to be used to repay the note. In the future, the investor technically was personally liable for the note, but from the seventh to the 10th year of the shelter program he could get out of paying the note if he desired.
The IRS ruled that even though on the surface the investor may technically appear to be liable for the note, there was really no obligation to repay since he could escape the obligation by simply electing to do so from the seventh to 10th year. Thus, the IRS disallowed all tax credits, depreciation, and interest on the purchase price of the video program represented by the $15,700 note. (The write-off, not specified in the ruling, was 6 to 1.)
The IRS also is taking steps to impose tougher rules on so-called ''opinion letters'' in prospectuses, usually written by a lawyer for the shelter's investors. The Treasury Department feels that some of the legal opinions are inaccurate or incomplete and attorneys now have guidelines they have to follow in giving a tax opinion. The American Bar Association has issued guidelines, too.
In most shelter cases, only severe abuses will be subject to an injunction drive - an understandable limitation considering the backlog of 325,000 shelter cases pending before the IRS and in the courts.
There are signs the effort is paying off. In fiscal 1983, the IRS has produced indictments against 88 promoters and the conviction of 45 so far with over 200 investigations of promoters under way, according to Wealth Building magazine (formerly National Tax Shelter Digest).
Perhaps the most dramatic case involving a tax-shelter scam came in New York City in November 1983, when federal authorities charged five men with conducting ''a massive tax-shelter fraud'' involving $130 million in false income-tax deductions.
The defendants were accused of operating two companies that supposedly bought and sold government securities that they said provided tax benefits for their customers and investors, who included prominent businessmen and entertainment figures.
Here are some examples of what the IRS and other tax experts consider to be abusive situations:
* The gemstones shelter. An investor buys gems for $1,000 from a promoter. The promoter tells the investor that $1,000 is the gems' wholesale value and that they will be appraised one year later for a value four times what the investor paid, or $4,000.
The promoter also tells the investor that he will then be able to donate the gemstones to charity and claim a deduction for $4,000. This is commonly referred to as the ''4 to 1'' program since the investor's deduction is four times his cost. If the investor is in the 50 percent tax bracket and claims a deduction of 000 for the gems, the theory is that he has made $1,000.
The IRS will argue that the deduction should be disallowed. If the gems were really worth $4,000, the investor would have made more money selling the gems for $4,000 and paying a capital gains tax of $600. He would have netted $2,400 instead of only $1,000. An investor will be hard put to rebut this argument by the IRS. As a result of IRS rulings, there are not as many gemstone shelters in effect now.
* Schemes involving master video games, stamp plates, and phonograph recordings - all especially popular on the West Coast - are similar. Basically, here's how they work:
To avoid ''at risk'' provisions, a promoter will set up a leasing transaction. The promoter establishes an empty or ''dummy'' corporation.
The ''corporation'' buys the master - a stamp, a recording or video master - putting up, say, $10,000 in cash, and borrows the rest, or $400,000. The ''corporation'' is personally liable for that debt.
After it buys the master, the ''corporation'' leases it to an investor. The investor's obligation is to produce a video cassette, records or stamps to sell, and the investor pays a lease payment in the first year of, say, $15,000. The ''corporation'' which is leasing the master passes through a tax credit to the investor.
So the investor gets a $15,000 deduction from the first year rent payment and a $41,000 investment tax credit, but a $26,000 cash return in the first year ($ 41,000 minus $15,000). In addition, there is a deduction for the $15,000 rent payment, which at a 50 percent tax rate, saves the investor $7,500 in tax.
''If it stood up,'' observes tax expert William G. Brennan of Valley Forge, Pa., ''it would be a real gold mine.'' He predicts that the IRS will disallow the tax credit on the basis that the corporation had no real obligation to pay the note and that the value of the master is overstated.
There are added risks in these types of shelters. In addition to the other penalties that can be imposed when a taxpayer understates his tax liability, the Internal Revenue Code provides for a special penalty when the understatement results from an incorrect valuation of property.
The whole question of tax shelters has become so complex and controversial that the Internal Revenue Service has set up a sort of advisory service to taxpayers. Any investor can send a copy of a suspect prospectus to: IRS, Room 2579, 1111 Constitution Avenue, Washington, D.C. 20224, and receive a revenue ruling that should provide some guidance. Of course, this could expose the taxpayer to an audit if the IRS decides the shelter is questionable, and the taxpayer invests in the shelter anyway.
Some experts question whether the IRS is interpreting the tax laws fairly. ''They (the IRS) are charged with the responsibility of interpreting the laws. The question is whether they are interpreting them properly,'' says Leon M. Nad, tax partner in Price Waterhouse, a nationwide accounting firm. ''On balance, they have a pretty good batting average but far from perfect.''