Run, don't walk, away from huge tax saving strategies for high-net-worth clients that seem too good to be true.

That's the warning from some advisors and lawyers who say that the government is heightening its efforts to scrutinize tax reduction investment strategies for the well-heeled, such as the use of foreign parties or counter parties not covered by U.S. tax laws.

There are a number of other dicey, aggressive approaches: Life insurance payment schemes that substitute for contributions to qualified plans and the infamous Son of Boss transaction.

Advisors and attorneys warn that many of these strategies are not worth the risk of audit and possible civil and criminal penalties.

"When you let the tax tail wag the dog, you usually end up in trouble," says Peggy Ruhlin, a certified financial planner and a CPA with her own advisory business in Columbus, Ohio.

"You have to ask yourself, is the risk worth the reward of these strategies?" says Michael Delgass, a tax attorney in Hartford, Conn., with the firm of Day Berry & Howard. Exchange funds, which he notes have been become more widely used by individual investors with concentrated stock positions, can still be carefully employed to reduce taxes.

But "the Internal Revenue Service and Congress have progressively limited the way you can structure an exchange fund," he warns.

A more risky strategy, he says, is the so-called mixing bowl-trading shares of one fund for another through the use of a temporary partnership. "This is much more aggressive than trying the exchange fund. Mixing bowls are higher-risk techniques, but they're still being done," Delgass explains.

The investor is at risk because he is relying on avoiding anti-abuse rules when going in and out of the partnership. These rules are written very "broadly," Delgass says. That means the IRS is given much leeway in making a case against investors and advisors who use the mixing bowl.

"So if you have bad facts, if the IRS can show there was intention all the time just to avoid taxes, then the investor will end up with capital gains right from the beginning, which is what you were trying to avoid," Delgass cautions. He says the IRS will then argue that "you always knew, in going into the partnership, that you were going to get out at a certain date. This looks to [them] like an immediate sale."

The best advice he can give clients, Delgass says, is to play the big tax reduction game as infrequently as possible.

"Avoid this aggressive approach whenever you can. And just use all the accepted resources to minimize the tax burden in the first place," concurs Louis Stanasolovich, a certified financial planner licensee with his own firm in Pittsburgh. Stanasolovich says that's because IRS officials, over the last year or so, have been publicly warning that some aggressive tax reduction strategies for the wealthy are becoming abusive.

Indeed, the tax authorities announced in a recent bulletin that "the Internal Revenue Service is aware that certain promoters are advising taxpayers to take highly questionable, and in most cases, meritless positions ..." The IRS cited amended returns that use "frivolous" tax reduction strategies. One red flag is a scheme to reduce the Alternative Minimum Tax through "the exercise of nonstatutory or statutory stock options."

Last year, the IRS warned that it was going to deal harshly with the Son of Boss, which is the trade name for a certain kind of basis-shifting strategy. Here's how this questionable tax reduction vehicle works, according to the authorities:

Options are put in a partnership. With the liquidation of the partnership, the taxpayer claims a fraudulent tax loss. For example, let's say that Taxpayer Jackson used the Son of Boss strategy. He purchases and issues stock in Corporation XYZ. Taxpayer Jackson pays $100 for the option to buy XYZ stock. Taxpayer Jackson then contributes to a partnership the $100 received on the sale of the option. The partnership assumes Taxpayer Jackson's obligation to satisfy the option that he has issued.

The value of Taxpayer Jackson's interest in the partnership is $0. However, some advisors and taxpayers argue that Taxpayer Jackson's basis in the partnership is actually $100 because his basis in the partnership interest is not reduced by the amount of the option obligation assumed by the partnership. Taxpayer Jackson then sells his partnership interest for $0 and claims a $100 loss.

The government will no longer allow this. When the new rules aimed at the Son of Boss transactions were issued, Assistant Treasury Secretary for Tax Policy Pam Olson said that "these regulations are part of our increased efforts to shut down abusive tax shelter transactions."

In targeting the Son of Boss transactions, the IRS also made a point of stating that some taxpayers using this vehicle would be assessed the full tax, interest and a penalty, although some provision would be allowed for transaction costs. In similar cases of questionable shelters, the IRS had generally imposed no penalties and had also allowed some part of the claimed deduction, notes Harvey Coustan, a retired CPA who worked for Ernst & Young in Chicago.

The Son of Boss crackdown, advisors say, is part of a larger trend of looking more carefully at various big tax-saving vehicles aimed at those with large incomes or an unexpected windfall.

"The IRS is questioning these things much more. They're actually looking more closely to make sure that these things are legitimate. We hear this a lot from the attorneys we deal with," says Stanasolovich. Family limited partnership deductions have been one of the tactics targeted by the authorities, he adds.

"The IRS is just waiting for people to cross the line. They're looking for people who want to take too big a discount for liquidity. Investment-only limited partnerships that only hold marketable securities, are also a potential problem," Stanasolovich says. He believes that family limited partnerships that own an operating business have a much better chance of steering clear of problems with the government. Liquid securities cannot generate as large a deduction for estate tax purposes as an operating business.

Another potential problem for the planner, an advisor said, are schemes that call for spending huge amounts on premium life insurance that can be deducted in lieu of large contributions made to qualified retirement plans.

"Someone might actually make this work, but I wouldn't take the risk," Ruhlin says. "I simply don't think you can write these things off." Advisors and clients are heading for problems whenever they try to hide or disguise income, she warns.

Take every deduction that you can, but you must have some reasonable basis, some precedent to cite, she adds. "Otherwise you're going to have the IRS cite you for fraud, and they will do that," Ruhlin says. She also says that she had heard "anecdotally" that the IRS is cracking down on tax shelter vehicles for the rich. She also said that these gimmicky tax shelters are often offered to individuals who have suddenly had a windfall.

"My clients, who have generally made their money over long periods, are not interested in these kinds of things," Ruhlin explained. Nevertheless, everyone who has large incomes would love to keep Uncle Whiskers from eating too much of their pie. So how can advisors help?

Stanasolovich says that his firm, in avoiding the controversial approaches, is trying instead to use maximum tax reduction strategies that have little potential for abuse. "We have a lot of business owners as clients. So we typically try to be a little more aggressive by setting up retirement plans for which you can get bigger deductions," according to Stanasolovich. He said many owners have simple plans. But he advises the client, whenever possible, to use profit-sharing plans in which the owner can sock away $40,000 a year. He adds that also fully funding IRAs is another effective, noncontroversial way to avoid the AMT.

Delgass says his clients are using derivatives strategies, which include the complex use of puts and collars. He sees them, at least for now, as a less controversial way to cut down on their tax bills. They work, in part, "because they are just not very well understood by the IRS and they're not crossing the line. There is no sale on many of these transactions because there still is investment risk." As long as the investor has some downside risk-even if it is hedged-the investor is protected, according to Delgass.

And then there are the garden-variety tax reduction approaches. Many of them still can work very effectively, Stanasolovich contends.

"These are areas in which we tend to be a bit aggressive. And we also encourage them [business owners] to look at all employee benefits that may benefit them and their employees at the same time," he says. Family tax strategies, such as the full funding of a child's education account, are also popular these days, according to Stanasolovich. These are reasonable ways to reduce taxation. But Stanasolovich says some tax reduction ideas advisors and their clients should never go near, such as buying large amounts of cash-value insurance in lieu of making normal retirement plan contributions.

"Some of these methods are legitimate. But the vast majority of these are not going to be accepted by the IRS," he says. They are as worrisome as the Son of the Boss scheme, he adds. While Delgass agrees this is bad, he says the use of foreign counter parties with IRAs is just as dangerous.

The scheme calls for the American party to shift the gains of an IRA to another person, "a tax indifferent party, that is living in another country and is not covered by American tax law," he explains. Even if that foreign country has a tax convention with the United States, it may not be complete.

"These kind of transactions are very aggressive and very risky. This is the kind of basis-shifting transaction in which the IRS has been extraordinarily aggressive in trying to stop, he asserts.

"When an investor or advisor is offered this kind of deal, the best thing to do is to run screaming from the room," Delgass says.