Warning Signs

Many entrepreneurs may not be getting sound tax advice from their financial advisors. Beware of these abusive tax shelters--no matter how a financial advisor may spin them, they're still illegal.

1. Setting up a new entity and transferring assets into it to avoiding paying income taxes: This is tax evasion. Surprisingly, business owners still buy into this advice from shady financial advisors. The most recent scheme the IRS successfully prosecuted netted almost $4 billion in settlements and involved about 750 corporate executives. The scam was sold mostly to corporate executives, who transferred their stock options to a family-controlled partnership, thereby avoiding income tax liability.

2. Buying an investment that promises to generate a loss solely to offset ordinary income: For example, you cannot invest money in exploring and drilling for oil--with no intention of finding any-then write off more than you spent.

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3. Using Foreign Leveraged Investment Programs and Offshore Portfolio Investment Strategies to generate substantial phony capital losses: Recently, a major corporation was fined $456 million for marketing, designing and obtaining legal opinions recommending that their wealthy clients invest in these stock swaps and warrants.