The IRS and Sham Transactions

A sham transaction is any business deal done without economic substance for the purpose of evading taxes. In evaluating whether a transaction is a “sham,” the IRS looks at the substance of the transaction rather than its form. When the IRS has determined that a particular transaction is a sham in its opinion, the transaction is unwound and treated as if it did not take place. The IRS will then adjust tax liability and impose interest and monetary penalties to the greatest extent possible. The IRS may also seek criminal prosecution for these sham transactions.

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