Tax and Trust Scam Bulletin Board - Archived Materials

July, 2002: Is IRS Losing the Battle Against Tax Cheats

July's Hot Topics article deals with the epidemic of tax-cheating and IRS efforts to combat it.  The internet has spawned a tax fraud industry ranging from trust scam artists to garden-variety tax protesters, all hawking their bogus schemes while thumbing their collective noses at the U.S. government.

            The "Foreign Source (IRC Sec. 862) Tax-Scam Exposed.

The Justice Department  filed suit in federal court in Harrisburg, Pa. against Thurston Bell. Bell is the founder of the National Institute for Taxation Education (NITE). According to the papers filed in that case, Bell uses NITE's Web site to promote his corrupt 861 scheme to potential clients.

 This latest tax scam asserts  that only income from foreign sources is subject to U.S. tax, and not amounts U.S. employers pay to U.S. citizens.  "The 861 argument is nonsense. People who file false claims for refunds are breaking the law and will be held accountable for their actions," said Eileen J. O'Connor, Assistant Attorney General for the Justice Department's Tax Division.

 The suit against Bell seeks to bar him from promoting his corrupt 861 scheme and requiring that he remove from the NITE website all materials promoting tax evasion.  Bell's case is one of four cases the Justice Department has filed recently to stop promotion of the foreign-source income scheme.

June, 2002:  Liberty School of Tax and Trust Scams is Silenced.

While most criminals learn new tricks of the trade by spending time behind bars, the tax scam business is so lucrative and brazen, it has its own schools!  Now, a federal court in Chicago has barred Rex E. Black of Beecher, Ill., who runs the infamous Liberty Institute,  from selling -- and from  teaching his "students" how to create and sell -- fraudulent trust plans used to evade federal income taxes.  The court ordered that Black post the court's order on the Internet.  The court also ordered him to turn over his lists of customers, and banned him from preparing federal income tax returns.

In addition, the order applies to affiliated organizations that Black has used to promote the trust schemes—The Liberty Network, Liberty Estate Planning, The Liberty Institute, Fiduciary Management Group, The National Council of Certified Estate Planners, Association for Certified Estate Planning Attorneys and Eagle Publications Trust.

Evidently, Black and his organizations help customers violate federal tax laws by allegedly transferring their income and assets to bogus trusts. They also advise customers to claim tax deductions for such non-deductible items as depreciation on their homes.

Black's "Liberty Institute" has supposedly "trained" over 2,500 people nationwide through "certification" courses resulting in a "Certified Estate Planner" designation. Liberty's graduates then  sell trust packages for $3,750, plus additional annual charges for tax return preparation, "trustee services," and secretarial services. IRS estimates that Rex Black's tax scams cost the government  more than $9 million annually.

"We are pleased that the court shut down this major scam, and that Mr. Black was ordered to post the injunction on his Internet sites. The Internet makes selling these kinds of tax scams remarkably easy, but the Department's Tax Division is going to use the Net to find and shut them down," said a government spokesperson.

Last year, 45 people were convicted of tax evasion for selling or using phony trusts. Defendants sentenced to prison an average of  more than five years. As of December 31, 2001, IRS had 160 open criminal investigations involving trust schemes.  IRS estimates that fraudulent trust schemes cost the public about $3 billion in lost revenue each year.

May, 2002: Irwin Schiff Sued by Disciple for Giving False Tax Advice

According to a report in by Jason Pierce CNSNews.com,  notorious tax-scam promoter Irwin Schiff has been sued by one of his disciples, Steven Swan, who claims he lost his real estate business after following Schiff's tax advice.  The civil suit claims $1 million for physical and emotional distress and $5 million in punitive damages.  Swan said that he was audited and used Schiff's theories in his defense to no avail.  Swan claims that Schiff is guilty of fraud, misrepresentation and negligence.

Schiff claims that his books carry disclaimers regarding the accuracy of information and that he is just presenting his "theories" regarding taxation.  Schiff blames the government for not agreeing with him, calling it  a "criminal government."

"If I told [Swan] to go rob a bank, would he do it? What is he, an idiot?" Schiff said.  Schiff clearly understands that his bogus theories regarding U.S. tax laws are equivalent  to telling someone to go rob a bank, and that those who follow his advice must be an idiot.  Mr. Swan has written a lengthy critique of Irwin's Schiff's arguments

Swan's webpage also includes his "personal story" regarding an on-going criminal grand jury investigation into Mr. Swan's alleged tax activities in promoting Mr. Schiff's books and theories.  According to his personal story, Mr. Swan wants to represent himself, rather than hire an attorney, and present to the court frivolous tax-protestor arguments (although not Mr. Schiff's frivolous arguments) as his defense to any potential criminal tax charges.  Unfortunately,  Mr. Swan just doesn't get it:  It is not just Mr. Schiff's tax protestor arguments that are worthless, ALL tax protestor arguments are equally as ludicrous. 

April 2002: Department of Justice Files Lawsuits Against Trust-Scam Artists.

The Justice Department has produced an easy to use and  hyper-linked Synopsis of Tax Protestor Claims, organized by category.  The synopsis provides the statutory and case law opposing garden variety tax protestor arguments from a prosecution perspective.  A rebuttal to the common tax protestor argument is merely a button-click away.

The Department of Justice filed multiple lawsuits in San Diego, Boston and Cincinnati in a continuing effort to shutdown sham trust promoters.  According to a DOJ press release, during 2001, 45 people were convicted for tax evasion arising from their participation in phony trusts.  Defendants who were sentenced to prison for five years on average.  As of December 31, 2001, the IRS had 160 open criminal investigations involving various trust scams.  Still, the promoters populate the Internet with phony claims of tax savings through the use of so-called "pure trusts" or "unincorporated business trusts or associations."

FAQ (4/02) Reward for Proving a Tax Protestor (Irwin Schiff) is Wrong

    A discussion of Irwin Schiff's phony reward for proving him wrong.

February 2002: Lynn Meredith and Her "We the People" Compatriots Get Indicted for Tax Fraud.

Notorious tax-scam promoter, Lynn Meredith, the so-called "daring of the Patriot's movement," was arrested along with six others associated with a tax fraud group known as "We the People" and " Sovereignty Pure Trusts"  on various federal tax fraud charges. 

According to the indictment, from October 1994 to November 2001, Meredith sold books and bogus trusts claiming taxpayers could legally protect income and assets from taxation. The defendants allegedly formed  phony trusts, opened bank accounts with phony Taxpayer Identification Numbers, filed fraudulent income tax returns and told  taxpayers not to file income tax returns.  We the People sold the "trusts" for approximately $500 at seminars and Meredith told taxpayers to file frivolous tax returns to send protest correspondence to  impede and obstruct IRS.

Meredith wrote books, including How To Cook A Vulture and Vultures In Eagle's Clothing, in which she falsely claimed that individuals could lawfully stop paying income taxes, stop their employer from withholding income taxes, and refuse to produce books and records to the IRS. Evidently,  Meredith earned more than $6.2 million from 1994 through 1999 as a result of the scheme. All defendants failed to file tax returns or pay taxes on their earning from  the scheme.

 

August, 2001: IRS Responds to Frivolous Tax Protester Claims; John Ellis and his band of Trust Scam Artists are Convicted of Conspiracy to Defraud the IRS; Navy Man is Considerably Lighter in the Wallet After Following Irwin Schiff's Advice.

    IRS finally took the "bull-by-the-horns" and issued a lengthy legal rebuttal to the frivolous arguments constantly made by tax protesters on the web and in court.   This is must reading for  those (especially those who send me email parroting the theories of their favorite tax protester) who insist that our tax laws are unconstitutional or that they can "de-tax" themselves by deliberately misreading the tax code.   Also, IRS issued a press release summarizing recent cases in which taxpayers made frivolous argument to the courts. 

    In Florida, a federal district court jury found Defendant John Ellis and his group of pure trust-scam artists guilty of conspiracy to defraud the United States and obstruction of grand jury investigations.  Ellis argued in vain the tax protestors favorite   rant: that the IRS has no jurisdiction outside Washington, DC and Puerto Rico to enforce the tax laws and that he (Ellis) is a "sovereign citizen" immune from IRS or court action.

    In an entertaining case involving inane tax-protestor theories, civil tax-fraud penalties were upheld against Gabriel Lopez, a Navy man who failed to file tax returns, relying on the infamous Irwin Schiff's book,  " How Anyone Can Stop Paying Income Taxes " as authority that he did not have to pay taxes.   The court amusingly dismissed Mr. Schiff as a convicted felon,  stating Schiff's book contained "stale, meritless and frivolous arguments that have been rejected by this Court scores of times..."  Evidently, Irwin is still active on the "suckers circuit" hawking yet another tax protester book. The lesson: If you are gullible enough to believe in Irwin's snake oil, be prepared to pay big fines.

July, 2001:  IRS to Hasten Prosecution of Frivolous Tax Claims

    According to the Los Angeles Times, IRS has moved against tax protesters who, when audited, have been gumming up the IRS bureaucracy by presenting frivolous tax claims.  IRS will no longer issue technical advice memos dealing with frivolous tax claims.  The Tax Prophet was quoted in the article saying, "Their [tax protesters] strategy is to protest everything, challenge everything..." ...  "The idea is just to muck up the bureaucratic operation--throw as much sand in the gears as possible."

April, 2001 IRS Launches a New Web Site Dealing with Tax Fraud and Trust Scams.

            IRS's Criminal Investigations Division has launched a new web site that deals with tax fraud, including employment tax schemes and trust scams. 

April, 2001, Tax Prophet Testifies Before the Senate Finance Committee

            The Tax Prophet appeared before the U.S. Senate Finance Committee, testifying on trust scams on the web.  His testimony involved the consumer fraud concerns of allowing "pure trust" websites to remain on the web, in violation of the consumer protection laws and anti-fraud statutes.  He drew a distinction between those websites which advocate changes to our current tax system (protected speech under the First Amendment) and those scam artists selling bogus and fraudulent trusts for thousands of dollars to unsuspecting or naive taxpayers.  He noted that often the consumer fraud websites use spam email to spread their message at little or no cost.  The April and May, 2001 Hot Topics contain the Tax Prophet's written testimony.  [Transcript of the Senate Finance Hearing].

            The Commissioner of Internal Revenue also testified at the hearing, empathizing that IRS is pursuing the promoters of tax fraud criminally.  He stated that more than 100 convictions have been secured and there were more than 100 cases in the criminal pipeline.   IRS has also beefed-up its efforts to educate the public by placing "red flag" warning signs on its webpages.  Thus far, IRS has not moved to shut-down websites, but believes that using its criminal enforcement functions along with educating the public will deter the spread of tax fraud on the web.

    The problem with IRS's approach is that it takes years to properly develop a criminal case and bring the defendant to trial. By that time, the skilled scam artist could have ripped-off hundreds if not thousands of  innocent consumers.  It is clear by the numerous websites promoting blatant tax fraud, these promoters have little or no fear that IRS will shut them down.  In fact, they use the number of websites operating without interference as evidence that their scams are legitimate; otherwise, they claim, IRS would shut them down.

  March, 2001, IRS Tax-Fraud Raid Targets Off-Shore Guru Jerome Schneider and Global Prosperity Group

         According to a front-page story in the New York Times, on Monday, March 6th, IRS conducted more than 36 searches and made four arrests in a massive effort to crackdown on tax fraud.

    Among the targets was the California offices of Jerome Schneider (the self-proclaimed guru of the off-shore trust and investment set) known for his glossy advertisements in many in-flight airline magazines.   Mr. Schneider has authored several books on the subject, including "The Complete Guide to Offshore Money Havens" and "How to Own Your Own Private International Bank." Note: Evidently, IRS also seized the records of Mr. Schneider's attorney, Eric Witmeyer.

    Schneider is also known for offering exclusive off-shore trust seminars on tropical islands and in Vancouver, British Columbia.   At one such event, the guest lecturers included a member of the House of Representatives, Billy Tauzin of Louisiana, and Iran-Contra figure Oliver North, who is now a radio talk show host.  

    The Institute of Global Prosperity, another alleged tax fraud promoter which operates through its website (http://www.igp.cc/), was also a target. According to an anti-IGP website (http://www.global-prosperity.com/), cease and desist orders have been issued by eight states against the group and CBS news is investigating allegations of fraud.

March, 2001 - Trust Scammers Get 11 & 6.5 Years in the Slammer.

    So far, 2001 has been a very bad year for those promoting fraudulent trusts.  Just ask the Hendersons.  Dorothy Henderson will be spending the next 11 years at "Club Fed, " no doubt rethinking her mindless argument that the U.S. government lacks jurisdiction over her and that IRC Sec. 861 (a provision that applies to foreign taxpayers) somehow excludes U.S. residents and citizens from our tax laws. [See the IRS Press Release]  The judge was so unimpressed with this frivolous claim, that when Mrs. Henderson defiantly argued at her sentencing hearing that she was exempt from taxes, he gave her an extra 6 months in the pokey!  Her husband, George Henderson, received 6.5 years in jail.

    Both defendants were sentenced to the longest permissible prison term under the federal sentencing guidelines. In sentencing the defendants, Judge Burrell stated that they had shown "outright defiance" and "disrespect for the tax laws of this nation," and that the only way to deter them from future violations of the law was "to put them away for as long as the law allows."

    For an excellent summary of what is happening to trust scam artists once they are caught, you must read, Jay Adkisson's report on Constitutional and Pure Trusts, appearing on his Quatloos website.  Jay provides a long list of court cases in which these scam artists have been shot down by the courts, along with an ever-widening list of trust-scam web sites waiting to rip-off the public.

    Folks, the choice is yours: Either comply with the tax law, or engage in these paranoid fantasies urged by the trust-scam crowd and risk spending a good chunk of your life broke, in jail or both.

March, 2001 - Six Charged with Money Laundering in Connection with Large-Scale Off-Shore Scam Trust Operation based in the U.S. and Costa Rica.

According to the Department of Justice Press Release, U.S. Attorney Donald K. Stern says:

Citizens moving money offshore in order to avoid paying taxes or to launder the proceeds of criminal activity is a significant law enforcement problem in the United States.  This undercover sting operation targeted a sophisticated group existing for the sole purpose of allowing U.S. citizens to avoid paying taxes and to hide their assets.  By targeting this corrupt organization, we are sending a strong message that law enforcement views such activities as very serious criminal conduct and will devote the necessary resources to prosecute such crime.

    It is significant to note that money laundering charges often carry longer sentences than tax crimes, which mean the government is now using two powerful crime statutes against alleged trust scam artists.

February, 2001 - IRS Sends Press Release Highlighting Eight Prominent Tax Scams.

On February 18, 2001 IRS issued a press release involving eight of the most common tax scams being perpetrated against the public.  The scams include:

  • Failure of employers to withhold wages on compensation
  • I don't pay taxes, why should you?
  • Afro-Americans get special tax refund
  • Pay the tax then get the prize
  • Untax yourself for $49.95
  • Social security tax scheme
  • You can get a big refund -- for a fee
  • IRS agents come to your house to collect

February, 2001 - Tax Protester Arguments Resurface - Irwin Schiff's Appearance on ABC's 20/20.

American's most notorious tax protester, convicted tax evader Irwin Schiff, is making the rounds on network television, evidently promoting his "zero return" tax protester scheme.  Undeterred by his string of losses in U.S. courts (see Tax Protestor Movement, Still Batting Zero), Mr. Schiff has a new book that claims -- guess what -- you don't have to pay income taxes.  This miracle is accomplished by simply filing a return with "0" in the spaces that call for numbers, then attaching Mr. Schiff's explanation to the back of the return.   Evidently, this charade is supposed to protect the taxpayer against the criminal charge of failing to file a tax return.  Unfortunately, this "protection" evidently does not extend to charges of  filing a false return or tax evasion.   Those who follow Mr. Schiff's latest advice could wind up broke, in jail or both.

For a humorous case of the "pot calling the kettle black" fellow tax protestor Otto Skinner takes on Mr. Schiff's zero income theory in a battle to win the hearts and minds of the "patriot" community.  Evidently, Mr. Skinner took offense to being called a liar by Mr. Schiff.  Mr. Skinner's response is Irwin Schiff Calls Otto Skinner A Liar, You be the Judge.  

October, 2000 - U.S. District Court orders American Express and Mastercard to provide credit and debit card information  pertaining to U.S. taxpayers involving banks in Antiqua, the Bahamas and Cayman Islands for tax years 1998 and 1999.

IRS estimates that $70 million in annual tax revenues is lost through off-shore tax evasion activities.  Failure to report transactions and pay taxes could involve the crimes of tax fraud, tax evasion and money laundering under U.S. law. 

U.S. citizens are required to inform IRS whether they have an interest in a foreign bank account on Form 1040, Schedule B.  If they do, then they are required to complete TD F90-221 if the aggregate amount held in all foreign accounts exceeds $10,000 at any time during the year. Currency transactions of more than $10,000 must be reported on Form 4789 and international transportation of currency or monetary instruments must be reported on Form 4790.

The lesson:  By focusing on the records of U.S. credit card companies, IRS has found an effective avenue of attack against off-shore tax havens. A lot of  U.S. tax evaders have reason to be nervous.

October, 2000 - Court shuts down THETAXPEOPLE.NET.

Renaissance, The Tax People, is a national tax firm located in Topeka, Kansas, which heavily promotes its "tax relief" system over the web.    The company, suspected of operating an illegal multi-level marketing "pyramid scheme" in violation of state consumer protection laws, agreed to shut down its website pending the outcome of a court trial. Kansas Attorney General Carla Stovall alleges that the scheme constitutes a "deceptive and unconscionable acts and practices," according to newspaper reports.

Renaissance's tax relief  system was based on dubious claims that taxpayers could start a home-business and then take business tax deductions.   Evidently, the so-called home business consisted of little more than marketing the tax relief system being pushed by Renaissance.

Although IRS has not brought an action against Renaissance, agents from both the IRS Criminal Investigation Division and the U.S. Postal Inspection Service aided the Kansas Attorney General in an extensive search and seizure operation.  Expect IRS action against Renaissance and those claiming false deductions under its scheme

The Off-Shore Tax Haven Industry Comes Under Attack by the U.S. and European Union.

Read my July, 2000 and August, 2000 Hot Topics columns entitled, The Demise of the Off-Shore Tax Haven Industry, Parts 1 and 2.   Tax cheats and international criminals beware: several of these countries, including Bermuda and the Cayman Islands, already have caved-in to the pressure, and more are sure to follow. These columns are a must read by anyone thinking of forming an off-shore company or placing their assets in an off-shore trust to evade taxes or creditors.

July 10, 2000 - The IRS'S Fight Against Abusive Offshore Trusts, published in Tax Notes Today.

Tax Notes Today, a national tax publication, has published an extensive article on abusive offshore trusts.  The article has extensive quotes from the Tax Prophet and Jay Adkisson, the author of www.Quatloos.com.   The upshot,  the case of Federal Trade Commission v. Affordable Media L.L.C., 179 F.3d 1228 (9th Cir. 1999) has disabled, if not permanently dismantled, the offshore asset protection industry.  Unfortunately, some of the asset protection attorneys quoted in the article are still in denial, pretending that the FTC case did not wipe out their cherished and lucrative practice.  Of course, these lawyers have never cited a U.S. case that has directly or remotely upheld the use of asset protection trusts to stiff one's creditors.

June, 19, 2000 - Bank Secrecy Crumbles

The Cayman Islands has agreed to waive its bank secrecy protections involving those who are being investigated for tax evasion by the U.S. and other developed countries.  Five other countries, Bermuda, Cyprus, Malta, Mauritius and San Marino, also have agreed to a shift in policy.  This turnabout was caused by the threat of being blacklisted as a tax haven by the Organization for Economic Cooperation and Development, a Paris-based organization active in routing out world-wide tax evasion.   This capitulation to the IRS demonstrates that the lure of an exotic tax haven, with bank secrecy laws to protect U.S. tax cheats, is merely an expensive illusion -- and one that can land you in jail.  Expect other tax haven jurisdictions to eventually fall in line.  The OECD is threatening economic sanctions, which might include stringent reporting requirements and loss of tax deductions, for taxpayers dealing with blacklisted countries.

May, 2000 IRS Criminal Investigation Division's Report to Congress

Just released, a candid and in-depth look at how the government is attacking and prosecuting tax criminals.  The bad news for the tax evaders -- including trust scam artists:  An average jail time of 3 years and an 85% incarceration rate!   Watch out: There are more than 120 trust scam criminal cases in the pipeline and 55% of those involve foreign trusts.  This report is must reading for those newsgroup and mail list groupies on the web who believe they can avoid taxes by using phony trusts.

April, 2000   Sham Trust Analysis

A legal analysis used to determine whether a trust will be considered a sham for tax purposes.  The analysis served as expert witness testimony given by The Tax Prophet in a recent criminal case. This step-by-step approach was designed to explain a complicated set of transactions to a  jury.

November, 1999:   The Tax Prophet is quoted in the American Bar Association Journal:

An article in the American Bar Association Journal discussing off-shore asset protection trusts, entitled 'Offshore Trust Busting" quotes the Tax Prophet as follows:

San Francisco tax attorney, Robert L. Sommers considers Anderson the death knell of APTs [Asset Protection Trusts]. "The only real question left for the asset protection industry is how to bail their clients out of these worthless structures before their clients wind up in jail," he says.

Hot Topics October, 1999 and November, 1999 - Tax Scams Victimizing Charities

A two-part series discussing the latest schemes involving charities and the IRS's response.  The split-dollar life insurance gambit and the charitable family limited partnership ploy are discussed in detail.  Must reading for those seeking charitable donations and their advisors.

Hot Topics August, 1999 and September, 1999 - The Asset Protection Industry - An Expensive and Wasteful Exercise in Wishful Thinking

The Ninth Circuit Court of Appeals in FTC v. Affordable Media LLC, 9th Cir. Case No. 98-16378 (June 15, 1999) skewered the theory that an off-shore asset protection trust can protect a U.S. person against his or her creditors, or can oust a U.S. court of jurisdiction over trust assets.  Instead, the defendant will probably sit in jail until the assets are repatriated to the U.S.  The court's decision must be considered by every U.S. person who has one of these trusts or is considering going off-shore to protect his or her assets.  In short, you are wasting your money and could wind up in jail. Will those making big bucks selling these trusts admit to defeat? Probably not, therefore, it is imperative that you obtain independent advice regarding these trusts.

Hot Topics June, 1999 and July, 1999 -High Stakes Audit Roulette- Corporate Tax Scams

December, 1999: Congress has cracked down on several widely-promoted corporate tax scams promoted by the big accounting firms.  These scams involve use of flow-through entities in an attempt to convert ordinary income into capital gains.  Unfortunately, many taxpayers have been suckered by these increasingly unscrupulous accounting firms, and their investment banker brethren.

Although much more sophisticated and complex than the schemes used by trust scam artists, these corporate tax dodges run afoul of the same sham transaction doctrine that nails the trust scammers.  Read how corporate America is trying to fleece the Treasury.

Abusive Trusts - An Internet TV Program 

ZDTV (Ziff-Davis television) alerted the public as to Internet scams involving abusive trusts on its Money Machine  program which aired on September 25, 1998.  The Tax Prophet was one of the experts interviewed. 

Current Topics -- Recent Criminal Cases Involving Tax and Trust Scams

NOTE: For press releases involving criminal tax cases, see the U.S. Attorneys' Tax Releases, organized by each state.

2/2002 Justice Department Releases Information on Recent Tax and Trust Scam Convictions

Billings, Montana, Donald Fletcher was sentenced to 78 months in prison and 3 years supervised release, and ordered to pay restitution of $10,000 and a fine of $100,000. Fletcher pled guilty to conspiracy to prepare false tax returns and commit mail fraud. Acting as a tax consultant, he held seminars and assisted taxpayers in setting up abusive trust arrangements. He falsely claimed that the trusts would permit taxpayers to deduct personal expenses.

In Wilton, New Hampshire, Richard V. Richelo, Jr. was sentenced to serve 18 months in prison for failing to file individual income tax returns. Richelo was convicted after a two-day trial. The evidence at trial established that Richelo was a software engineer who earned approximately $116,000 in 1994 and $98,000 in 1995, but did not file federal income tax returns. Richelo claimed that he had studied the tax code and believed he was not required to file income tax returns because the compensation he received did not constitute income under the Internal Revenue Code. The judge ruled that Richelo's compensation did indeed constitute income. The judge further noted that the argument Richelo used has been consistently rejected by courts across the country.

Melody J. Bohrer of New Berlin, Wisconsin, was sentenced to serve four months in prison for failing to file an Employer's Quarterly Federal Tax Return, Form 941. Bohrer owned a company that provided landscaping, lawn care and snow plowing services.

In Miami, Florida, John P. Ellis, Sr. was sentenced to serve 10 and a half years in prison. The evidence showed that Ellis marketed sham "common law" trusts and fraudulently claimed that the trusts were tax-exempt because they were "foreign" to the United States. More than 150 customers were identified as having purchased more than 360 trusts or trust packages, at prices of $20,000 and more.

In New Haven, Connecticut, William N. Jackson was sentenced to serve 42 months in prison, followed by a period of supervised release. Jackson was convicted on multiple counts of aiding and assisting in the preparation of false federal income tax returns. The evidence showed that Jackson created fraudulent business expenses to offset reported income for his clients, and that he reported fictitious dependents and inflated expenses, including gifts to charity. The judge also found that Jackson gave false testimony at trial.

In Reno, Nevada, Palle "Pono" Bognaes was sentenced to serve 80 months in prison and 3 years supervised release, and to pay $29,598 in restitution to the IRS for conspiring to defraud the United States, evading more than $2 million in federal taxes, and obstructing and impeding the IRS in the collection of those taxes. He also was ordered to pay $107,752 in restitution to a client from whom he took unauthorized withdrawals and to pay $4,861 for costs of his prosecution.

In Sacramento, California, Lonnie D. Crockett was sentenced to 42 months in prison followed by 36 months probation and ordered to pay a fine of $67,500. Crockett pled guilty to defrauding the IRS in a nationwide tax evasion conspiracy that involved the concealment of income through a chain of domestic and foreign bank accounts and trust arrangements. Three doctors from northern California also pled guilty in connection with the scheme. Daniel Bullock, an orthopedic surgeon, Richard D. Pfeiffer, an orthodontist, and Richard Shearer, an ear, nose and throat specialist, were sentenced to prison for 18 months, 27 months and 24 months, respectively, and ordered to pay fines and back taxes.

In Greenville, North Carolina, Charles James Payton was sentenced to serve 78 months in prison followed by 3 years supervised release. In addition, Payton was ordered to pay restitution to the IRS in the amount of $87,073. Charles Payton was convicted on of seven counts of willfully aiding and assisting in the preparation of false income tax returns and one count of conspiracy.

9/2000 Major Criminal Tax Conviction in Trust Scam Case

Update: March, 2001 - Dorothy  and George Henderson received 11 and 6.5 years in prison, respectively, for their trust scam activities.   Judge Burrell stated that the defendants  had shown "outright defiance" and "disrespect for the tax laws of this nation," and that the only way to deter them from future violations of the law was "to put them away for as long as the law allows."

Dorothy and George Henderson, operators of  "G&D" Associates, a notorious trust-scam mill, were convicted on several criminal counts, including conspiracy to defraud the IRS and aiding and abetting the presentation of false tax returns to IRS.  The defendants were thrown in jail immediately upon conviction.   The defendants earned over $1 million in fees from the scam over a 4-year period. The Hendersons targeted doctors and other wealthy professionals and used offshore bank accounts located in the Caribbean to conceal the illegal activity.  Articles from the Tax Prophet's Tax and Trust Scam Bulletin Board were found in Defendants possession and read to the jury as evidence that Defendants their trust scam activities were criminal.

IRS claims this case is part of a nationwide crackdown on tax evasion schemes using fraudulent trusts. IRS Special Agent Dwight, J. Sparlkin commented, "The message should be clear: the IRS will aggressively pursue those who are promoting illegal and abusive trust schemes."

The trust scam involved the typical pure trust scheme detailed in my April, 1996 Hot Topics article Using Trusts to Avoid Paying Taxes - Will This Work? in which a business is placed into a phony trust and then subtrusts are formed to create fictitious deductions.  The trust scam in the Henderson case was similar to the fraud perpetrated by convicted trust scam artist, Ronald Chappel, who is now serving 87 months in prison.

9/2000 Defendant Lyle Hotchkiss - Dentist and Trust Scam Participant

Defendant Lyle Hotchkiss was a dentist who decided to buy into the trust scams. He was convicted and as part of his sentence which includes 27 months in jail, the judge ordered him to buy a full-page ad in the Grand Rapids Press to express his willful evade of taxes and to urge others not to evade taxes. According to the Grand Rapids Press, at sentencing, the judge in the case had this to say about Defendant, " Instead of consulting experts, Hotchkiss relied on 'uneducated snake-oil salesmen' who persuaded him that the tax system could be defeated. "

6/2000 Jail Time for Abusive Trust Promoters:

A Minneapolis jury found Defendants Rois and Reinke  guilty of conspiracy to defraud IRS by marketing fraudulent trusts.  Two more defendants will wind up in the slammer for selling the typical trust scam in which the gullible purchasers tried (and failed) to write off their homes and personal expenditures as deductible trust expenses.   Defendants earned in excess of $100,000 by ripping off the public, they failed to declare this income and  then tried to hide their income in one of their phony trusts.  The same sorry result awaits those of you who insist these bogus arrangements will save you taxes.

5/2000 IRS Criminal Investigations Division's Report to Congress on Recent Criminal Tax Convictions -  The following descriptions of recent convictions appears in this CID Report:

Chappell, et al. Investigation

In May 1999, Ronald Chappell, a former CPA from Roseville, California, was sentenced to 87 months imprisonment for defrauding the IRS by promoting bogus trusts.

In June 1998, Louis R. Mayer of Clearwater, Florida, was sentenced to six months imprisonment and six months of home detention after he was convicted in February 1998 of conspiring to impede and impair the IRS from administering the tax laws. Mayer was also convicted of six counts of aiding and assisting in the preparation of false income tax returns.

The indictment charged Mayer, a promoter of foreign and domestic contractual trusts, with employing a series of trusts to generate fraudulent deductions and conceal the income of two of his clients from the IRS.

NOTE:  The Chappel case has received substantial coverage on the Tax Prophet Website.



Hawley T. Webb, an accountant and return preparer from New Port Richey, Florida, was also sentenced to 30 months imprisonment followed by two years supervised release for his role in the scheme.


Bradley Investigation

In June 1999, Edgar Bradley and his sons, Edgar Bradley II and Roy Bradley, were sentenced to 60, 57, and 46 months imprisonment followed by 3 years supervised release, respectively for conspiracy to defraud the IRS and for failing to file tax returns. In an attempt to conceal income, the Bradleys, who were found guilty by a Federal jury, assigned their income to several nominees and purported irrevocable trusts that had no economic substance.  The Bradleys also attempted to conceal their assets from the IRS by the conveyance of real property from their names to purported trusts and nominees.


Rivera Investigation

In January 1999, Pedro Ivan Rivera, a physician in Carrolton, Texas, was sentenced to 37 months imprisonment followed by three years supervised release and ordered to pay $414, 819 in restitution to the IRS for tax evasion for the years 1992 to 1996. Rivera created trusts, including one for his family residence, that he controlled and used to conceal his income. In addition, Rivera transferred funds between trusts, offshore corporations, and their corresponding bank accounts located in the U.S., Bahamas, and the Channel Islands in order to conceal taxable income.


Morris Investigation

In July 1999, James C. Morris of Cincinnati, Ohio was sentenced to 24 months imprisonment followed by 3 years of supervised release for tax evasion and for attempting to interfere with the administration of the IRS.  Morris admitted he impeded the IRS by selling sham trusts that were used to conceal assets and income from the IRS and others. Morris also admitted he was a member of the Pilot Connection Society and later its successor, the Liberty Foundation, an organization that sold so-called "untaxing packages" and assisted its members in circumventing the filing of Federal income tax returns and payment of Federal income tax.


Foster, et al. Investigation

Karl Foster, of Blaine Minnesota, was convicted of conspiracy to obstruct the IRS, aiding and assisting in the filing of a false tax return and aiding and abetting another person to obstruct and impede the IRS. In May 1998, Foster was sentenced to 78 months imprisonment followed by three years of supervised release.

Foster was a tax consultant, who created and sold trusts designed to conceal income and assets from the IRS. Foster advised his clients that trusts were tax-free because they were sovereign from the U.S. He also advised clients they were citizens of the Republic of Minnesota and therefore did not have to pay taxes.

8/99 Senate Bill 899 Attacks the Off-Shore Banking Industry

The U.S. Senate is considering sweeping legislation that will make it a crime to assist with money laundering or crimes in the U.S.  Under this legislation, foreign operators who engage in services that assist another to commit a crime (principally money laundering and tax evasion)  would become criminals under U.S. law and subject to extradition if they came to the U.S. or visited a country with an extradition treaty with the U.S.

Also, the legislation would require convicted criminals to repatriate assets held outside the U.S. to the jurisdiction of a U.S. court or they could be subject to "obstruction of justice" charges and sentenced to additional time in jail.   This legislation fits the Anderson Case scenario  (Hot Topics July and August, 1999, see FTC v. Affordable Media LLC, 9th Cir. Case No. 98-16378- June 15, 1999), in which the Andersons formed an off-shore asset protection trust and transferred their illegal profits to the trust in an attempt to thwart the U.S. courts of jurisdiction. Note: The Andersons  were not charged with a crime so the legislation would not technically apply to them. Senate Bill 899 is found at http://www.congress.gov (search new bills: "s899").  Also, see Jay Adkisson's analysis of the pending legislation.

8/99 Cayman Islands Secrecy Broken by IRS

In another blow to off-shore asset protection schemes, John M. Mathewson, owner of the defunct Guardian Bank & Trust Limited of Grand Cayman (one of  hundreds of Cayman banks promising secrecy) has provided IRS with over one year's worth of bank records.  In exchange for probation, Mathewson exposed over 2,000 clients who used his bank services to hide income from  IRS. Investigations are occurring in 20 states and the government expects to collect $300 million in back taxes, $50 million of which has been collected thus far. Several depositors have plead guilty to tax crimes. IRS claims it has now broken the Cayman Island secrecy laws and will be pursuing U.S. tax dodgers. This case is another example of the dangers lurking for those who attempt to cheat on their taxes by hiding income off-shore.

7/99 Estate Preservation Seminars Enjoined by Federal Court

A federal court has enjoined a CPA, attorney and promoter from marketing and selling abusive tax shelters.  The scams involved included Estate Preservation Services, Asset Preservation Trusts, Estate Management Trusts and New Dynamics Foundation which involved phony private charitable foundations.  The court rejected the defendants' assertion of First Amendment freedom of speech rights. NOTE:   The 9th Circuit upheld this injunction in April, 2000.

6/99  - Cook Islands Trust Broken; Asset Protection Squashed

In a landmark decision, the Ninth Circuit Court of Appeals  crushed a Cook Islands asset protection trust and the asset protection industry advocating use of such trusts, by upholding contempt charges levied against taxpayers by the district court. The court's decision will be the subject of my August and September, 1999 Hot Topics. The district court case was reported on this page as follows: A federal judge who refused to put up with U.S. Taxpayers' (Anderson's;) "B.S." about their Cook Islands trust, forced them  to repatriate their foreign assets, by throwing them in jail for 6 months, until they finally caved in. (See Jay  Adkisson's February 99 Newsletter).  The Andersens engaged in a telephone fraud rip-off, then hid their assets in a Cook Island foreign asset protection trust.  The Andersens were confident that no U.S. court could claim their assets -- WRONG!  The court merely exercised its jurisdiction over the Andersens and threw them in jail until they repatriated $1.3 million of their ill-gotten gains.

The Lesson:  Foreign asset protection trusts are worse than worthless, unless you are prepared to flee the jurisdiction of the U.S. courts and spend the rest of your life in hiding; otherwise, the judge will hold you in contempt (i.e. throw you butt in the pokey) until those foreign assets are returned to the U.S. Next time you are told about the wonders of foreign asset protection, lock yourself in your closet for about 3 days, then wonder how 6 months at "club fed" will feel.


Federal Convictions

The following defendants were each convicted in jury trials in federal court.  That means each and every one of the 12 jurors in each case found, beyond a reasonable doubt, the defendants guilty of serious tax crimes. So much for fooling the public with these scams.  The lesson:  This crackdown is nationwide and if you are caught, expect jail time.

5/2000 CID Report on Criminal Convictions (see discussion above)

9/15/98 - Two Business Owners Using Sham Business Trusts Convicted of Tax Evasion:  Daniel Stewart and Donna Stewart of Cincinnati were convicted of conspiracy to defraud the U.S. by interfering with IRS's ability to assess income taxes, as well as multiple counts of tax evasion. The Stewarts operated several Danco transmission businesses in Cincinnati. They established sham business trusts to hide their income and failed to pay personal taxes.

8/28/98 Criminal Convictions in Celebrated International Trust Scam Case. Ronald L. Chappel, Todd Gaskill, Martin Goodrich and Lloyd R. Winburn were convicted in federal court in Sacramento, California, on a variety of felony tax crimes involving fraudulent trusts. Defendants' "Cheek" defense failed to persuade any of the jurors.

Note: These convictions were upheld on appeal on 7/5/00:

UNITED STATES OF AMERICA, Plaintiff-Appellee, v. TODD C. GASKILL, Defendant-Appellant. UNITED STATES OF AMERICA, Plaintiff-Appellee, v. MARTIN L. GOODRICH, Defendant-Appellant. No. 99-10154, No. 99-10155 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

8/13/98 - A Texas physician, Dr. Pedro I. Rivera, was convicted of felony tax evasion for using fraudulent domestic and off-shore trusts to hide approximately $1.44 million of income. Instead of practicing medicine, Dr. Rivera now sits in jail, awaiting his sentencing.

6/12/98 - A Florida conviction on felony tax charges of two men, Louis R. Mayer and Hawley T. Webb, who were using fraudulent trusts to conceal income.

6/24/97: Court of Appeals Upholds Conviction for Structuring Transactions to Avoid Reporting Requirements:  Joan N. Noske's conviction for structuring cash transactions to evade the $10,000 cash reporting requirement was upheld by the Eight Circuit Court of Appeals (U.S. v Noske, 80 AFTR 2d Par 97-5051).  The currency reporting violations occurred as part of a sham trust arrangement implemented to prevent IRS from collecting taxes.

Observation:  In both the Rivera and Chappel cases, physicians were involved in the trust scams.  Evidently, highly-paid and resentful doctors make for easy victims of these promoters.  Doctors and dentists should be aware they are targets. To avoid financial and professional ruin, always obtain a second opinion from an independent and qualified tax advisor.