A tax avoidance transaction is any plan or arrangement devised for the primary purpose of avoiding federal income tax, and includes but is not limited to, “listed transactions” as defined by the IRS. It is common for these schemes to move funds through trusts or partnerships as a way to avoid taxation.
The Tax Exempt and Governmental Entities Division of the IRS is responsible for policing abusive tax shelter schemes and transactions. Generally, when the IRS discovers an individual has participated in a tax avoidance scheme, he or she is penalized, and will owe back taxes with accrued interest.
Source: IRS, Illinois Revenue Department