A tax shelter provides a way to lower the amount of tax you pay to the federal government by decreasing your taxable income. This can be used by a person or a business to avoid taxes by lowering how much you are responsible for paying.
Tax shelters are a useful way to lower the amount of tax to be paid to the federal government. However, because they can be used illegitimately, the IRS regulates them closely to ensure that they are not being used to evade taxes. The way a legitimate tax shelter works is that they invest or deposit into accounts that are not taxed as much, such as retirements or charitable donations. Through these investments income is still generated, compared to an illegitimate shelter that only hides the money. While tax is still assessed when money is taken out of the sources, it is often at a lower rate than if income tax had been taken out. Therefore, if you utilize legal means of sheltering income from being taxed, it can be very useful. However, if you are using illegal means of sheltering your money it is considered tax evasions and there are serious consequences.