A Tax Strategy Sounds Great. What Could Go Wrong?

Treasury officials have raised questions about sophisticated investment strategies designed to reduce taxes, prompting investors and advisers to examine where legitimate tax planning ends and unacceptable tax avoidance begins.

The issue extends beyond whether a strategy is technically permissible. Investors must also consider the possibility of an IRS challenge, whether a change could be applied retroactively, and how much time and money they are prepared to spend defending their position.

Jeff Levine, chief planning officer for Focus Partners, said this requires investors to assess something rarely discussed: their tax risk tolerance.

Below is a transcript of the interview with Levine, edited for brevity and clarity.

Why Treasury’s comments raised alarm bells

Robert Powell: We have an interesting question this time. It involves tax-aware long-short funds, box spreads, and Section 351 exchanges. Why are these strategies receiving attention?

Jeff Levine: At a recent industry conference, Treasury officials raised alarm bells by saying they were interested in learning more about certain strategies.

Those comments have been closely parsed. What may have been intended as a request for more information has caused people to ask whether these strategies are legitimate, whether investors are abusing the tax code, and whether the IRS could ultimately shut them down.

The comments raise a broader issue. Investing and taxes sometimes intersect. Certain investment strategies can help minimize an investor’s tax liability, but not every strategy carries the same degree of tax risk.

We’re very comfortable talking about investment risk tolerance, but we’re not as comfortable, and we don’t often think about tax risk tolerance.

How tax strategies enter a gray area

Powell: How should investors distinguish legitimate tax planning from an abusive strategy?

Levine: Some strategies are clearly permitted. For example, no one would say that an investor is abusing the tax code by buying municipal bonds and receiving income that is not subject to federal income tax. That is simply how the law works.

At the other extreme, some transactions are clearly abusive. Suppose someone buys land for $500,000 and then claims that a conservation easement for not developing it is worth $10 million. That would make no sense when the entire property was worth only $500,000.

Those are the two extremes. Between them is a gray area, and that gray area contains different degrees of risk.

What tax risk tolerance means

Powell: Investors are familiar with investment risk tolerance. Should they also think about tax risk tolerance?

Levine: Yes. Investors and advisers are generally comfortable discussing investment risk tolerance. They talk about how much someone should hold in stocks, bonds, cash, and real estate.

They are less comfortable discussing tax risk tolerance. Strategies such as tax-aware long-short investments and Section 351 exchanges may carry some degree of tax risk.

An investor should ask where a strategy falls on the spectrum. How likely is the IRS to challenge it? If the IRS acts, will the change apply only in the future, or could it affect completed transactions?

If a change is prospective, a transaction that has already been completed may remain intact, although the investor might not want to repeat it. If the IRS applies a decision retroactively, the investor could face a more immediate financial consequence.

The investor must also decide whether he or she is willing to challenge the IRS. That could mean dealing with an audit or potentially going to tax court.

These are questions a reasonable investor should ask before adopting a sophisticated tax strategy.

There are two extremes, but in the middle, there exists a gray area.

When a tax pitch needs another opinion

Powell: Treasury Secretary Scott Bessent advised people to think twice when presented with a tax pitch that sounds too good to be true. It seems investors need a sounding board rather than relying entirely on their own judgment.

Levine: More complex strategies are difficult to evaluate by definition. Investors should consider asking a CPA or another tax professional to review the proposal. Their financial adviser should also be involved.

When large sums are at stake, an investor may want an independent opinion from tax counsel about whether the strategy is likely to withstand scrutiny.

How much protection a tax attorney’s opinion provides

Powell: What can investors learn from a tax attorney’s opinion?

Levine: When the tax treatment is uncertain, an attorney may issue an opinion describing the likelihood that the strategy will qualify under the law.

The level of confidence can vary. An opinion might say that a strategy has a reasonable likelihood of qualifying, that it is more likely than not to qualify, or that it should qualify.

None of those opinions is a guarantee. When the law does not provide a clear yes-or-no answer, uncertainty remains.

Think of a six-sided die with five red sides and one blue side. You could reasonably expect it to land on red, but it could still land on blue. A tax opinion can express confidence in a position without eliminating the possibility that the IRS will disagree.

What investors should weigh before proceeding with tax-reduction strategies

Powell: How should an investor decide whether the potential tax benefit is worth that uncertainty?

Levine: Consider how much the strategy could save in taxes. A larger benefit may justify accepting more risk.

Then consider the strength of the tax position and the consequences if the IRS disagrees. How much inconvenience are you prepared to accept? Are you willing to go through an audit or tax court? How much time and money are you prepared to put behind your position?

The decision is not simply whether the strategy might work. It is whether the potential benefit is worth the risk and the burden of defending it.

How much of a pain in the neck will it be if the IRS does not agree with your position?

Powell: Investors with questions should not simply roll the dice. They should seek advice.

Levine: That’s right. Listeners can send their questions to focusonfinanceforum@finstream.tv.

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This story was originally published September 19, 2026 at 2:03 AM.