What is the potential downside of a tax shelter?

The potential downside of a tax shelter is highlighted by the aspect of increased audit risk. Tax shelters often involve complex transactions or structures designed to minimize taxable income. While these strategies can be legitimate and legally reduce tax obligations, they are also scrutinized closely by tax authorities. The intricate nature of these shelters may raise red flags, prompting a higher likelihood of an audit by the IRS or other tax governing bodies.

Authorities are concerned about abuse and potential tax evasion, which can result from improperly structured tax shelters. Hence, taxpayers may find that while they aim to achieve tax savings, they inadvertently attract unwanted attention from auditors, leading to potential investigations and compliance costs that can offset any benefits gained through the tax shelter.

In contrast, the other choices do not accurately capture significant downsides associated with tax shelters. Although tax shelters might lower a taxpayer's income, that is typically the intended advantage. Simplifying tax filing is not generally a characteristic of tax shelters, as they often require extensive documentation and understanding of complex laws. Furthermore, while some tax shelters can indeed be illegal, many are legitimate strategies within the law, which means legality alone is not a universal downside.