That irresistible real-estate tax-shelter deal that a business associate wants you to sign up for -- the one that promises to save you $8 in taxes for every $1 you invest in rental apartments -- could be a quick ticket to a federal courtroom, heavy fines and even criminal penalties.
At the very least, it could cost you more than the dollars you sank into it, thanks to the tough new legal weapons against "abusive" tax shelters that have just been added to the federal tax code.
Nearly 40,000 investors in real estate limited partnerships across the country are already under investigation by the Internal Revenue Service, according to sources at the agency. That number should jump sharply next year and in 1984 under IRS Commissioner Roscoe Egger's aggressive audit and prosecution plans.
But there's no need for small-scale investors to run afoul of the new law, say top tax attorneys and tax-shelter experts. Real estate limited partnerships that are likely to get into trouble with the IRS display telltale warning signs. Here are some of the most important:
* High tax write-offs -- particularly those promising $4, $5 or more in deductions for every $1 from your wallet. The higher the alleged tax shelter in a real estate partnership, the more suspicious you should be. As one prominent Washington real estate tax attorney, Stefan Tucker, puts it: "If a shelter looks too good to be true, it probably is."
* Investments that promise you personal use of the property you're buying, along with steep business write-offs. Some "time-share" partnerships on the market now tell investors they can enjoy personal use of their resort units while still taking deductions on them for depreciation and other business-related expenses. That's a combination virtually guaranteed to make IRS auditors see red.
* Overvalued real estate -- often bought by the partnership promoters at artificially inflated prices to boost tax deductions. George C. Wilson, vice president of the New Jerseybased tax shelter analysis firm Robert A. Stanger Co., says he regularly detects overpayments for properties in the fine print of "private placement" (nonpublicly registered) partnership-offering documents.
For example, a promoter might buy a building for $6 million and then sell it to a partnership he's organizing for $7.5 million. Not only does the promoter stand to turn a quick profit on the deal, but also the inflated price he has charged the investors buying into his partnership could land them (and him) in deep trouble with Uncle Sam.
The economic reality of the building, says Wilson, is that its rent can barely support the $6 million price. The $7.5 million is intended solely to puff up depreciation, mortgage interest and other up-front tax shelter write-offs -- a form of financial shenanigans that any IRS auditor worth his salt will detect.
* Real-estate tax shelters using the so-called "Rule of 78s" to compute interest deductions for partners. As noted in this column last week, the IRS is likely to disallow use of the Rule of 78s -- a technique designed to "front load" interest write-offs on a loan in its early years -- in connection with real-estate shelters.
* Tax-shelter offering documents in which the attorneys or accountants cited as authorities are either little known, unknown or, worse, not authorities at all.
The best rule on tax shelters -- even on relatively small, innocent-sounding investments -- is to consult your own tax or legal adviser before signing up. But here's an unsettling fact you ought to know: It's possible that your adviser is working hand-in-hand with the tax-shelter promoter.
It's unethical, and no one has solid statistics on how widespread the practice is, but some attorneys and accountants accept what are known as "review fees" -- cash payments that can run into thousands of dollars -- from tax-shelter organizers.
The "review fee" is paid in exchange for the attorney's or accountant's cooperation in circulating the real-estate tax shelter documents to prospective investors.
In effect, the attorney or accountant touts the tax shelter as a good investment, but is actually in a conflict-of-interest position vis-a-vis the investors being advised.
So the next time someone offers you the deal of a lifetime, ask if any review fees have been paid by the promoter. If the answer is yes, get your counsel -- and your deal of a lifetime -- somewhere else.