A High-Tech Traffic Cop at the IRS Can Catch Tax Shelter Abusers

Experienced highway drivers know that if they see brake lights, cars might be slowing down because a state trooper is around the bend with a radar gun. Once these drivers “safely” pass the trooper at a reduced speed, they typically hit the gas and go back above the speed limit.

There is a similar dynamic in tax. When you start seeing a flood of advertising from promoters on new ways to beat the tax system, it signals that people believe the IRS is no longer watching.

As IRS commissioner, I saw this happen with the employee retention credit, or ERC—which started out as a legitimate, Covid-19-era tax incentive to reward small businesses that avoided layoffs. As the pandemic receded, a wave of fly-by-night promoters emerged who marketed the credit long after the period of eligibility had expired.

These promoters seized an opportunity—an under-resourced IRS and a tax credit whose eligibility criteria was complicated enough to blur the line between compliance and fraud.

But just as the volume of ineligible credit claims surged, Congress provided the IRS with new resources, and we moved aggressively to stop billions in fraudulent claims. Unfortunately, a substantial number of improper credits already had been issued. While the IRS was able to claw back some of it, the promoters had mostly packed up and disappeared.

So who held the burden of paying back the erroneously claimed credits plus penalties? The businesses that had been misled.

With IRS enforcement resources on the decline, history is now repeating itself. This time, it’s a booming market for abusive tax shelters. A Bloomberg Tax investigation painted a sobering picture of that market.

Promoters are pitching complex strategies aggressively through wealth advisers, social media, elaborate private placement documents, and conference presentations. One scheme promised investors a $250,000 charitable deduction for a $50,000 investment, routed through shell companies acquiring digital technology that purportedly would be donated to charity at five times its cost. Another involves nonexistent sovereign tribal tax credits sold to small business owners, doctors, and salespeople who took out loans expecting refunds that will never come.

What makes these schemes particularly insidious is that, like the ERC, most of the taxpayers caught up in them aren’t trying to cheat; they’re trying to manage their tax burden legally, and they trust a promoter who told them they could.
The pitch often looks credible—legal opinion letters, structured investment documents, professional presentations. What these taxpayers don’t know, and have little way of knowing, is that the legal theory underneath it all wouldn’t survive IRS scrutiny. By the time it doesn’t, the promoter has collected their fees and moved on, while the taxpayer shoulders the liability.

So just like with ERC, it’s becoming urgent for the IRS to act. But can the agency do so this time? There are legitimate reasons to wonder.

The IRS has lost tens of thousands of employees. Its budget is expected to decline further. The Justice Department’s specialized tax division has been restructured. News coverage has fed a sense that the highway is unpatrolled and the speed limit is theoretical.

A quick civic lesson in how the IRS works may reveal this assumption to be risky. The statute of limitations on audits typically runs three years and is longer when fraud is involved. If you enter a risky shelter based on what IRS enforcement looks like today, you need to consider how it will look in 2028 or 2029.

Could an infusion of new funding to expand IRS enforcement be on the horizon? US Sen. Angus King (I-Maine) hopes so. He and three Democratic senators introduced legislation on April 15 that would add substantial resources to the IRS. And while there are strong political headwinds facing King’s bill today, winds can shift.

Perhaps more pertinent, a recent GAO report highlighted the IRS expanding its use of AI in enforcement operations. So it may not be a highway trooper waiting around the bend, but a high-tech camera. A surveillance infrastructure in our tax system powered by AI could mean that in the near future and certainly within the window of the statute of limitation, the IRS will be flagging for audit the taxpayers who availed themselves of specious shelters.

So the taxpayer who thinks they’re speeding on an unwatched highway today are leaving a trail that is already on the record. And the promoter who told them the road was clear will be nowhere to be found.

The popular image of IRS enforcement is of an agency hunting down the average taxpayer—auditing returns, demanding receipts, making life difficult for people who are simply trying to get their taxes right. The reality is far more nuanced and, in the current moment, almost the opposite. Our tax system is genuinely complex, and that complexity creates opportunity for promoters who profit by convincing ordinary Americans that they have found a legal shortcut.

Most of the taxpayers pulled into abusive shelter schemes aren’t bad actors; they’re people who trusted the wrong adviser. A well-resourced IRS that can disrupt predatory shelters isn’t their adversary. It is, in the most practical sense, their protection.

Danny Werfel has twice served as IRS commissioner, most recently from 2023 to 2025. He is now executive in residence at the Johns Hopkins School of Government and Policy and a distinguished fellow at the Polis Center for Politics at Duke University, writing about the intersection of tax and policy.

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