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Beware: Basket options could land you in hot water with IRS

Businesses and individuals have long pursued strategies to protect their assets from heavy tax burdens. The Internal Revenue Service, however, is constantly searching for strategies that may be skirt the line of what is legal. If the IRS comes after a strategy that you use, it may be wise to work with a tax attorney to ensure you and your assets are protected.

The most recent crackdown on a tax strategy is focused on so-called basket options. The basket options are being used primarily by hedge funds as protection from federal taxes. The IRS, however, called basket options tax shelters and told hedge funds that any use of them must be reported.

Why is the crackdown on basket options happening now? The IRS estimates that the hedge funds that benefit from them have avoided billions of dollars in federal taxes. In short, the IRS wants what it believes it is owed.

Guidance from the Senate Finance Committee prompted the crackdown. Now, hedge funds using basket options are required to report them -- and the new rule is retroactive through 2011.

Different interpretations of federal tax law can lead to varying strategies to avoid taxes. While some have stated that they believed basket options were compliant with the law, clearly the IRS thinks otherwise.

If you are unsure of a strategy or find yourself facing consequences after using a strategy the IRS does not approve of, working with an experienced tax law attorney is a good way to protect yourself and your best interests. The right lawyer can help minimize the impact on you and your assets.

Source: Reuters, "Update 2-U.S. IRS cracks down on hedge funds' tax strategy," July 9, 2015

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