Finance Urges Rossotti to Crack Down on Internet Tax Scams

The Finance Committee has urged IRS Commissioner Charles O. Rossotti to crack down on Internet tax scams, according to the unofficial transcript of the April 5 panel hearing on tax "schemes, scams, and cons."

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"I'm worried by claims that the IRS is the dog that doesn't bark -- or perhaps bark enough -- about Internet tax fraud," Senate Finance Committee Chair Charles E. Grassley, R-Iowa, said. "The IRS must be active in this arena, catching these hucksters early before they have time to sell their wares."

Senate Finance Committee ranking Democrat Max Baucus of Montana also warned that Internet tax scams cost taxpayers hundreds of billions each year -- witnesses set revenue loss at around $300 billion a year -- and he urged Rossotti to aggressively pursue shutting them down.

Rossotti, who called the proliferating Internet tax avoidance schemes "organized tax evasion," told the panel he was intrigued by some of the suggestions -- particularly, ensuring the IRS Web site is named in searches -- but he said education is not necessarily the problem, but rather investigation and follow-up work, both of which are costly.

Comments from witnesses indicate they agree that the Internet has become "fertile ground" for scams. "Our government's lack of enforcement is precisely the reason why pyramid and tax evasion scams are flourishing on the Internet today," said Aaron Bazar, who once was involved in an Internet pyramid tax avoidance scam. Certified financial planner J.J. MacNab told the panel she recently spent two hours surfing the Internet and hit 28 Web sites promoting tax avoidance schemes. Attorney Robert Sommers, who runs a Web site exposing tax fraud, suggested the IRS seize on what he considers the one weakness of the scams: the need for a taxpayer identification number. Denver attorney Joseph G. Hodges suggests the IRS establish an amnesty for victims of the scams to encourage them to talk about how they were duped.

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STATEMENT OF:

THE HONORABLE CHARLES E. GRASSLEY
A United States Senator from the State of Iowa

THE HONORABLE MAX BAUCUS
A United States Senator from the State of Montana

THE HONORABLE FRANK H. MURKOWSKI
A United States Senator from the State of Arkansas

A Panel Consisting of:

MR. AARON BAZAR
seller of tax scams for Institute for Global
Prosperity, now operates computer website,
www.global-prosperity.com, which alerts taxpayers to the scam he
helped run
North Potomac, MD

MS. JJ MACNAB
tax scam watchdog
Certified Financial Planner
Chartered Life Underwriter
Insurance Analyst
operates website, www.deathandtaxes.com
Bethesda, MD

MR. ROBERT SOMMERS
Attorney
operates computer website partially devoted to
exposing tax fraud, www.taxprophet.com
San Francisco, CA

MR. JAY ADKISSON
Adkisson Financial, LLC
operates computer website, www.quatloos.com,
whose purpose is exposing fraud
Irvine, CA

MR. JOSEPH G. HODGES, JR.
Attorney-at-Law
Member American College of Trust and Estate Counsel
www.actec.org
Denver, CO

A Panel Consisting of:

MR. CHARLES ROSSOTTI
Commissioner
Internal Revenue Service
Washington, DC

MR. HUGH G. STEVENSON
Associate Director for Planning and Information
Bureau of Consumer Protection
Federal Trade Commission
Washington, DC

MR. MICHAEL BROSTEK
Director
Tax Administration and Justice Issues
U.S. General Accounting Office
Washington, DC

OVERSIGHT OF THE INTERNAL REVENUE SERVICE
"TAXPAYER BEWARE: SCHEMES, SCAMS AND CONS"
THURSDAY, APRIL 5, 2001

U.S. Senate,
Committee on Finance,
Washington, DC.

The hearing was convened, pursuant to notice, at 10:25 a.m., in
room 215, Dirksen Senate Office Building, Hon. Charles E. Grassley
(chairman of the committee) presiding.

Also present: Senators Murkowski and Baucus.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM
IOWA, CHAIRMAN, COMMITTEE ON FINANCE

[1] The Chairman. Thank you all very much for your patience while the Senate casts the 2 votes of this task. Normally, it would be my practice to start the hearing and to have the hearing go on with Senator Baucus and myself alternating as chairs to keep the hearing going.

[2] We are here today to talk about a growing problem, hundreds of thousands of Americans who are participating in or considering participating in tax scams. Tax scams are as old as our tax code. The Internet is giving them a thriving new life. The number of participants in these tax scams is growing like a weed.

[3] The Internet, of course, is greatly helping that growth. The Internet gives these tax con artists the unprecedented ability to reach out to millions of households very cheaply and very easily. We will hear testimony today that tax scams are not limited by income or geography.

[4] Through the Internet, the con artists are making their pitch to Americans of every income level and targeting individuals throughout our country. For example, my own State of Iowa reports that it has seen record levels of scams and abuse in related areas of securities fraud.

[5] This hearing will give the American people a better understanding of the snake oil that these hucksters are selling. We will hear about the old style scams, such as pure trusts, constitutional trusts, compensation for slave descendants, even setting up your own church. All of these are being put into new bottles and sold.

[6] Let me be very clear that the focus of this hearing is solely on those tax schemes that are wholly outside the tax laws. This hearing is not about the gray areas of the tax law that have been referred to as corporate tax shelters. This is certainly a very important topic. And this as a very important topic is one that the committee will be reviewing and addressing later this year.

[7] As important in educating the American people to be aware of these tax con artists is, of course, reviewing the IRS' response to Internet-based tax fraud. Some of the bad apples claim that they must be right because the IRS has not caught them.

[8] I am worried, of course, about claims that the Internal Revenue Service is a dog that does not have a bark or perhaps not barking enough about this Internet tax fraud. So I think the agency must be active in this arena, catching these hucksters early before they have time to sell their wares because an ounce of prevention is worth a pound of cure, to be true here.

[9] Of great concern are those promoters who are encouraging employers not to withhold income and payroll taxes for their employees. These employees are put in a terrible position, having to choose between the tax man and their jobs. And that is not right. And it should be the top enforcement priority of our Internal Revenue Service.

[10] The agency should have active enforcement in this area. I think the agency can perform its critical enforcement duties while still giving the taxpayers protection that the constitutional laws allow. This is the same, if you stop to think of it, that police departments across the country are able to successfully perform their duties while balancing the needs to protect citizen's rights.

[11] The IRS, tax experts, and we in Congress, all have a duty to ensure that taxpayers do not listen to the silent song of the tax con artist, and even better, that taxpayers do not even hear the song in the first place.

[12] Now, to Senator Baucus.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM MONTANA

[13] Senator Baucus. Thank you very much, Mr. Chairman. Obviously, this hearing is very important. We have a problem. Eleven days from now on April 16th, most Americans would have filed their returns. All told, they will pay about $1.1 trillion in income taxes at the very time we are debating the $2 trillion budget.

[14] We could have a larger tax cut, prescription drug benefits, pay down the debt more quickly, and pay for other priorities simply by cracking down on these 6-figure tax cheats, costing the government and the American people approximately $200 million a year.

[15] In return, honest, hardworking taxpayers have a right to expect many things in exchange for their compliance. One of the most basic is fairness. We all understand that people do not like to pay taxes. Nobody does. But they especially do not like paying someone else's taxes. And that is exactly what happens if our tax system allows folks to cheat on their taxes and get away with it.

[16] Unfortunately, there is evidence that cheating is becoming increasingly common. I was struck awhile ago this month when I was walking through an airport on my back home to Montana. And I saw a copy of a Forbes magazine headline, "How to cheat on your taxes". I can tell you, that caught my eye. [Laughter].

[17] I mean, as a ranking member of the Finance Committee, I thought, hey, I had better learn about that. I better get that article and read it and see what is going on. And so I did.

[18] Now, there are articles and there are articles. And you have to take everything you read with a grain of salt. But I was stunned by this article. I have a hunch that it is at least on the mark in terms of being on the right track. I may not be totally accurate, but it is clearly on the right track.

[19] The article tells about more and bigger tax shelters than before, Caribbean tax havens, use of sham trusts, websites that promote outright tax fraud, the steady growth in the garden variety under reporting.

[20] It is a problem, a big problem. If it persists, the average taxpayer who is playing by the rules and paying his or her share, will feel like a chump. Support for our system based on a largely voluntary system of reporting will deteriorate if not collapse.

[21] Today's hearing gives us a chance to get a better understanding of this problem and the most significant forms of tax evasion. Why are they growing so rapidly? Most importantly, what can we do about it? How do we stop it?

[22] Nobody loves the IRS. We have to give it the tools to do the job. Otherwise, the vast majority of honest taxpayers who are grumbling, but paying their fair share, are paying higher taxes while someone is getting a free ride.

[23] One last point, we have certainly have to be balanced here. You all recall that a few years ago, we were very concerned about an over zealous, sometimes abusive IRS. Hearings were held right here on that point.

[24] Now, the pendulum has swung I think a bit too far in other direction. We are concerned that at least in some cases the IRS should be doing more than it now is. Of course, we should react, but we should not over react. We should figure out how to crack down on tax cheats and illegal shelters without posing unnecessary burdens on the average, hardworking, honest taxpayer.

[25] I hope this hearing helps us to get this problem resolved. Thank you, Mr. Chairman.

[26] The Chairman. I call on Senator Murkowski.

OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, A U.S. SENATOR FROM ARKANSAS

[27] Senator Murkowski. Thank you very much, Mr. Chairman. I look forward to our expert witnesses. I think this is long overdue. And as a consequence, the realization that here we have in America an industry on the Internet whose sole goal is to rip off the American taxpayer.

[28] I do not mean the people who pay their money to these scam artists on the phony ways to avoid paying taxes. But the people being ripped off to a large degree are honest Americans who will be struggling this weekend and probably next weekend to fill out their tax forms and pay their taxes.

[29] Now, as a former banker, my observation is a little naive out there. But nevertheless, the realization is in the figures. By one estimate, sham trusts and other schemes are costing the treasury as much as $300 billion a year. That is an astounding figure, Mr. Chairman.

[30] And you know at this very moment on the Senate floor, what we are engaged in as a historic debate on whether we can return $1.6 trillion of the surplus to honest, taxpaying Americans over the next 10 years.

[31] If we could just rip out these tax scams, we could afford to return not $1.6 trillion, but $4.6 trillion back to honest American taxpayers over the 10 years. Just think about it, $300 billion a year is what this is costing.

[32] Now, what I do not understand is if there are hundreds of websites advertising and promoting these phony schemes to avoid paying taxes, why hasn't the IRS, why hasn't the FBI, why hasn't the Department of Justice established a specific strike force to shut down and prosecute the operators of these sites?

[33] Now, here is a website that I picked up the other day. It claims that it can teach you how to legally eliminate the Form 1040 income tax and keep 100 percent of the money you earn. Think about that. People are buying this evidently. Now, if this claim is true, then every American certainly would have figured it out.

[34] But we know it is not true. Yet, the site continues to operate openly and blatantly. Why? Mr. Chairman, if a website advertised legal heroin, legal cocaine, is there any doubt that the FBI and the DEA would have thoroughly investigated and prosecuted the operators?

[35] The basic question that I want answered is why hasn't law enforcement been more aggressive in prosecuting these scams? And what type of resources do we really need to aggressively crack down on these frauds?

[36] I do not know who said it, Barnum and Bailey, you can fool some of the people some of the time, but not all of the people all of the time.

[37] Senator Baucus. I think President Lincoln.

[38] Senator Murkowski. Well, in the second round, it was Barnum. That is close enough.

[39] This has turned into a circus obviously. Thank you, Mr. Chairman.

[40] The Chairman. We thank you, Senator Murkowski.

[41] Our first panel here is going to discuss these Internet connections. And they are going to do it from the standpoint of some of them as participants, some of them as combatants.

[42] We have Aaron Bazar, computer engineer, North Potomac, Maryland involved with the Institute of Global Prosperity, in a tax scam, lost $8,000, now operates a website that alerts consumers to the Global Prosperity scam.

[43] JJ MacNab, Ms. MacNab is an insurance analyst and certified financial planner, a fervent tax scam watchdog who monitors the Internet for newly formed trust scams.

[44] Then, Robert Sommers, an attorney in San Francisco, specializing in tax law, operating website www.taxprophet.com, and writes a biweekly tax column in the San Francisco Examiner.

[45] Then, Jay Adkisson of Irvine California, an asset protection attorney and investment advisor, also started www.quatloos.com.

[46] Is that how you pronounce that?

[47] Mr. Adkisson. Yes.

[48] The Chairman. A website devoted to warning consumers about various tax and financial fraud.

[49] Finally, our panel has Joseph G. Hodges, Jr., attorney and sole practitioner from Denver, speaking on his behalf today, a member of the American Bar Association, Real Property Probate Trust Section, the American College of Trust and Estate Counsel. Like other witnesses, Mr. Hodges seeks to educate consumers of trust scam artists.

[50] We will go in the order in which I introduced you.

[51] So Mr. Bazar.

[52] And then, we will have questions after everybody has testified. Also, let me state an administrative matter. If you have longer statements than your 5-minute presentation, those statements will be included in the record without your asking permission. If you have supplemental material that is not too great of an extent, it will be included as well. Otherwise, if it is larger, it will be received for our files.

[53] And the red light, it does not mean that you have to stop right at the red light, but try to at that point summarize very quickly to make your last couple of points.

[54] Mr. Bazar.

STATEMENT OF AARON BAZAR, NORTH POTOMAC, MD

[55] Mr. Bazar. Thank you, Mr. Chairman. Good morning, Senators. Thank you for inviting me to speak today. It is an honor to be here. Last year, I lost approximately $8,000 in 4 month's time in a pyramid scam propagated over the Internet.

[56] It all started when I received an unsolicited, bulk e-mail message for a business opportunity. The e-mail said that I could make thousands of dollars and learn how to legally eliminate taxes. Four months later and not a penny richer, I discovered that this business had cease and desist orders in many States.

[57] I was already disenchanted with the group because I felt that what they were teaching was not quite right. In addition, nobody I knew was actually making the money, except the person who initially brought us into the pyramid.

[58] So I asked for a refund. When that did not work, I tried to get the authorities involved to put a sop to this fraud. Finally, after that did not work, I started my own website to warn the public.

[59] The site has received tens of thousands of visitors over the past year. And I am positive that the site has helped many people from getting scammed, a job that the IRS, FBI, and FTC, as well as the State attorney generals are all failing miserably at.

[60] Our government's lack of enforcement is precisely the reason why pyramid attacks and evasion scams are flourishing on the Internet today.

[61] When I first joined the institute of Global Prosperity, I had never even heard of the freedom movement. And I knew very little about very little about tax protesters. I was just in it for the money.

[62] It seemed like such a good idea at the time. I mean, who would not want to work from home, make thousands of dollars a week, and learn how to legally stop paying taxes just like the wealthy elite of our country.

[63] One reason these groups are so successful is that they pry on those who already distrust the government. These people are all too willing to believe the misinformation on the Internet and in the teachings of these groups. However, if they are like me and have no anti-government inclinations, then the con men do their best to reeducate you.

[64] They drill ideas into new recruits like the government spies on us, we are tracked by our Social Security numbers. They will say things like the 16th amendment was never ratified. So taxes are illegal.

[65] They will explain to you how paying taxes is voluntary because the IRS tells us so right in the tax code. So you can just choose not to pay. Or that the Federal Reserve is run by the ultra wealthy and they illegally create money.

[66] The majority of citizens in the country know that the tax system is completely unfair and benefits the wealthy. When somebody tells you that you can just leave the system by using special, get out of tax free forms in lieu of a 1040, it sounds too good to be true.

[67] When you are then shown in your 1040 instructions exactly where it says that filing taxes is voluntary, you start to wonder. And then, finally, when you see many other people who have stopped paying taxes completely using these documents, you are sold.

[68] Senators, I have never heard of the IRS stopping any of the thousands of people who are using these methods to evade paying taxes. And believe me, I have looked. If Americans are really obligated to pay federal income taxes, why does the IRS allow these people to continue to selling these products? And why are they not prosecuting those who are using them?

[69] The IRS encourages the tax protestor movement by their lack of enforcement. I have a better chance of being audited because I sent in a 1040 and pay my taxes honestly. Those who do not follow the 1040 seem to be getting away with it.

[70] Let me get back to the Internet. Most scams on the web today employ the use of unsolicited bulk e-mail, otherwise known as "spam" to recruit people and their products. In my opinion, spam is truly the root of all evil on the Internet.

[71] No legitimate company uses spam to advertise, only pyramid schemes, pornography sites, stock market scams, and other illegitimate businesses use spam. Spam cost consumers billions of dollars a year based on recent studies.

[72] I know that there are already bills in Congress that are addressing the spam issue. And I hope it becomes illegal to send out these unsolicited, commercial e-mail. It will save the country billions of dollars paid by consumers and it will help prevent these pyramid and ponzi schemes from spreading as fast as they are.

[73] If you have any doubts about how far reaching the problem is, I suggest that you check your private e-mail accounts. The chances are good that you will have e-mail with lines like "make #2,000 to $5,000 per week from home or eliminate credit card debt or legally reduce your taxes".

[74] These are e-mails sent out by IGP and other groups like them. If you have not received e-mails like these, then you soon enough. It is only a matter of time. My website has many samples of the spam that IGP sends out. And if you are interested, it is www.global-prosperity.com.

[75] If somebody wants to steal from people, the Internet is the place to do it. The chances of getting caught, in my opinion, are virtually nil. IGP has been stealing from people for 5 years now without any repercussions. They ignore cease and desist orders because they know they can get away with it.

[76] After I was scammed, I dutifully reported Jeff Seigal, the IGP agent, who ripped me off. I reported him as well as other IGP leadership to my State attorney general, the State attorney general of New Mexico, the GBI, the FTC, and anybody else who might listen.

[77] I also contacted the Massachusetts attorney general's office because IGP's drop box was located there. And I also contacted the attorney generals in Washington State and Oregon. Nothing happened.

[78] When I spoke to the various attorney generals' offices, they told me things like they had no money, it was the other States' problem, or it is the FBI's jurisdiction because IGP crosses State lines or it was a securities issue.

[79] At least, the Maryland attorney general's office was honest with me. The officer there said that nothing was going to be done.

[80] The Chairman. I imagine it is a tough spot.

[81] Mr. Bazar. Yes. I will finish up. I am about done, Mr. Chairman.

[82] The Chairman. Please, go ahead.

[83] Mr. Bazar. I guess my point is that the Internet is a great place to be a criminal because you will not get caught. If you area tax protestor, there has never been a better forum to get your message out and make money too.

[84] I think I can stop there.

[85] The Chairman. Thank you, Mr. Bazar.

[The prepared statement of Mr. Bazar appears here on the Senate Finance Committee website.]

[86] The Chairman. Ms. MacNab.

STATEMENT OF JJ MACNAB, CERTIFIED FINANCIAL PLANNER, CHARTERED LIFE UNDERWRITER, INSURANCE ANALYST, BETHESDA, MD

[87] Ms. MacNab. Good morning, Mr. Chairman and members of the committee. Roughly, two and a half years ago, I received a telephone call from a charity, a client of mine. They had just seen a presentation about something called a pure trust and wanted to know whether this remarkable sounding strategy might be beneficial for their donors.

[88] The promoters guaranteed that anyone who placed their business and personal assets in this plan would never pay taxes again. From the charity's point of view, this meant that their donors would have much more after-tax income to donate to charity.

[89] I started to research the pure trust. And I turned to the Internet for information. I found literally hundreds of websites promoting this concept. And after considerable digging, I finally located the notice from the IRS that they had issued in 1997, warning taxpayers that this particular planning tool was a sham that offered no tax benefits whatsoever.

[90] Over the past 2 and a half years, I have continued to keep a close eye on this industry. And from what I have seen, there are 2 main types of tax cheaters out there. There are those that cheat in small ways. I will refer to them as detailed cheaters. And then, there are those that cheat by trying to reduce their income and estate and capital gains taxes as close to zero as they possibly can. And I will refer them as big picture cheaters.

[91] Detailed cheaters might include someone who over inflates their home office deduction or who exaggerates the value of an automobile given to charity.

[92] The second group, the big picture cheaters generally fall into 3 distinct categories. There are tax protestors--they have been around for years--sham trusts and offshore ventures. And the Internet has proven to be very fertile ground for the big picture cheaters.

[93] Prior to the Internet, only the very wealthy were offered complicated schemes to reduce taxes. And then, they were usually charged exorbitant fees in the process.

[94] Now, anyone with a modem and a computer can play the games that were once limited to the wealthy. The problem is these mass market people do not have the sophisticated advisors to tell them which schemes work and which schemes do not.

[95] The growth rate for the online tax evasion industry is phenomenal. And unfortunately, right now, there are no dampening effects on this growth. To the average consumer, the IRS is practically invisible. And when you hear stories about friends and neighbors and e-mail correspondents who have gotten away with tax evasion for years and in some cases decades, the risk of audit begins to feel negligible.

[96] In the past couple of weeks, there has been a lot of talk about the IRS using matching software to compare income from various sources with tax returns. To me, it would appear that such mathematical research is hunting for detailed cheaters only.

[97] As long as the big picture cheaters are effectively paying zero in taxes, all this time and money spent on small tax discrepancies is relatively fruitless. Right now, the online tax evasion industry is still relatively small. Most taxpayers out there are honest and ethical. And they use common sense to determine whether the advice they are receiving is good or whether it is a scam.

[98] But the online tax fraud is growing so quickly, it is almost impossible to keep track of it. Now is the time to put a stop to it while it is still comparatively small. But stopping this industry in their tracks does not appear to be a goal right now of the IRS.

[99] The promoters are not to find. As an exercise, I put aside 2 hours of uninterrupted time to see what kinds of things I could find by browsing on the Internet. To summarize, in 2 hours, I looked at 28 websites promoting questionable tax products and information.

[100] I found multilevel marketing schemes offering everything from anti-snoring devices to constitutional products side by side. They guaranteed to remove all your assets and income from any future taxes.

[101] I found a church selling church charters for $300 so that you can "free your church, yourself, your business from undue tax burden". I found numerous forms of offshore trusts, offshore international business companies, and offshore private banks.

[102] And perhaps, the most disturbing item was the website from a group whose founders were investigated by the criminal investigation division and who were arrested this last February. This would actually be Mr. Bazar's ex-group. And despite the arrest, more than a month ago, the websites and therefore their businesses are still up and running.

[103] And this brings me to my main point. While the IRS' stated mission may be to better serve their customer, the taxpayer, it would seem to me that the customer would be best served if the IRS stopped these promoters as quickly as possible. Their undercover investigations often take more than 2 years to complete. During this time, the promoters are bringing in potentially thousands of new marks.

[104] And as I said earlier, the promoters are not difficult to find. They are not hiding what they are doing. Almost every website I found in my 2-hour search included the name, address, and phone number for the promoter. All but one was located in the United States.

[105] And they do not just exist on the Internet. They are in in-flight magazines, on radio talk shows. They take out full-page ads in USA Today and the Washington Times. There is actually an example on a chart on the side here. This ran I believe three times in major publications.

[106] They are practically begging the IRS to review their products. And unfortunately, the IRS' silence is being interpreted as permission to continue.

[107] Thank you very much.

[108] The Chairman. Thank you, Ms. MacNab.

[The prepared statement of Ms. MacNab appears here on the Senate Finance Committee website.]

[109] The Chairman. Now, Mr. Sommers.

STATEMENT OF ROBERT SOMMERS, ATTORNEY, SAN FRANCISCO, CA

[110] Mr. Sommers. Yes. My name is Robert Sommers. I am a tax attorney from San Francisco. Good morning, Mr. Chairman and members of the committee. I have a website called the tax prophet. And as part of my website, I runt he tax and trust scam bulletin board. I do this for one reason. It is to warn consumers about tax fraud, especially trust scams.

[111] To illustrate the problem, I have a little experiment for everyone in this room. The next time you are on a cross-country flight or an international flight, check out the ads for offshore banking services in the in-fight magazine.

[112] When you do that, you will come to one conclusion. There is a global industry with just one mission: separating Uncle Sam from his tax dollars. Take that industry now and migrate it to the web. And what you have is a global industry with an instant reach of every U.S. taxpayer who has access to a computer.

[113] Mr. Chairman, I am of the old style here with the tax scams. My focus is on the tax scam artists and something called a pure trust which is neither. My focus is on how they work and how to stop them.

[114] The pure trust, in my opinion, is the foundation for all tax scams regardless of their complexity. The pure trust has been unchanged essentially for over 4 decades. The people who promote them, these trust scam artists, are the masters of form over substance.

[115] Think of the pure trust as a magical black box. Taxable income pours up at the top. You pour it in. And magically, tax-free income flows from the bottom.

[116] There is really 2 essential elements to the pure trust. One is a persuasive sales pitch which has remained unchanged since 1958. And the other is reams of worthless paper and documents calculated to trick the buyer into thinking they are doing something real.

[117] There are 2 purposes for the pure trust. The first one is to hide the true ownership in income from all creditors, but especially the IRS. And then, the second purpose is, if discovered, these pure trusts have the ability to obstruct and stonewall.

[118] And their promoters promote this to say, look, we can stonewall the IRS and the courts. Essentially, what they are doing is throwing sand into the bureaucratic machinery of not only the IRS, but also the courts, especially the tax court.

[119] I would like to demonstrate how the pure trust works while we set that up. Let me just tell you the impact of the Internet. It has 4 consequences. What the Internet has really done is created what I call high-tech snake oil.

[120] Let me go through what the 4 consequences are of the Internet. And then, I will get to the chart. By having the Internet, what we have is the snake oil salesman now has a worldwide reach, number one. They have expanded their marketplace throughout the globe. And this is becoming a problem not only in the U.S., but other taxpaying societies, Australia, Canada, parts of Europe.

[121] By having so many websites out on the Internet saying the same thing, it reinforces the legitimacy of the argument. The trust scam promoter can now look someone straight in the eye and say, look, there are 60, 80, 200 websites out there saying the same thing. This is right.

[122] The Internet has allowed the use of e-mail. Spamming is a critical part of this. In other words, they can send out their get- rich-quick schemes to drive traffic to their website.

[123] The Internet also allows these people to study tax fraud. What they have is they have an Internet community there where they can look and see what other people are doing and so they can fine tune their scams to always stay one step ahead of the IRS.

[124] Just a quick example. The IRS for years was known not to audit trusts. That is how the pure trust operator knew that the IRS audited 1 out of 10,000 trusts or so. But then, IRS came out saying that they were going to crack down on trusts.

[125] So what the pure trust people said was, well, if they are going to track down on trust, we will start calling these foreign trusts in which no tax returns are filed and no income is reported. The goal there, of course, is to fly beneath the IRS radar and to always stay one step ahead.

[126] Let me just demonstrate just a typical 3 trusts, pure trusts scam. I have 3 trusts. I have trust 1 is a business trust. Trust 2 is what I call a siphon trust. And trust 3 is the residence trust.

[127] Let us assume that a business has $1,000 of income and $200 of expenses. So it would have $800 of taxable income. Well, the trust promoter forms a business trust. And now, the money flows into trust 1.

[128] What happens though is that out of $800, they will pay $50, that is really step 3, flowing into this residence trust, but $750 will go to what is called the siphon trust. The siphon trust will contain lots of phony deductions, inflated inventory. They may be charging outrageous rates for leases and things.

[129] So out of the $750 that goes into that trust, only $150 leaves that trust. What happens now is I have $200 in my residence trust.

[130] Well, this is the fun one. What happens is that the person setting up the trust is told, well, the trust needs a headquarters. Well, why do we not make it your residence?

[131] So they start depreciating the residence. Oh, you need a caretaker allowance. So what we will do is pay your medical bills, your food bills, your travel bills, your kid's education, all of that. So at the end, by the time we are finished, maybe $50 will flow out to the taxpayer's Form 1040.

[132] In this example, $800 of income has disappeared down to $50. That is your pure trust scam in a nutshell. The idea of flowing money around was to eliminate self-employment taxes up at the top there because they will want to avoid those too.

[133] Let me just summarize very quickly. IRS needs to be committed against combating tax fraud. I have 3 concrete suggestions, all of which I think can be instituted without much cost. They need to have a strike force to search down these websites and shut them down. They also need to that with spam. They need to crack down on span.

[134] Two, they need to fight propaganda with information. They need to develop their own separate website to educate the public regarding these scams and to have what we call a one-stop web portal for tax fraud information.

[135] In other words, everyone in the country needs to go to just one cite and they will find all the information necessary whether it is reporters, whether it is taxpayers, whether it is professionals.

[136] And then, finally, they need a PR blitz. They need to get down and dirty with these people and do advertisements, do public service announcements, put article in industry magazines, maybe even show up at trade shows and have a trade show booth. They need to do interviews and talk show appearances.

[137] In conclusion, as our last presidential election showed, the presidential candidates go where the voters are. They were on Oprah. They were on Larry King. They know where the voters are. In essence, the IRS has to go where the taxpayers are as well.

[138] Thank you.

[139] The Chairman. Thank you, Mr. Sommers.

[The prepared statement of Mr. Sommers appears here on the Senate Finance Committee website.]

[140] The Chairman. Now, Mr. Adkisson.

STATEMENT OF JAY ADKISSON, ADKISSON FINANCIAL, LLC, IRVINE, CA

[141] Mr. Adkisson. Thank you, Mr. Chairman and members of the committee. Our Nation is plagued by a growing industry of fraud. This is an industry with a significant and increasingly sophisticated infrastructure that has as its purpose to cheat many thousands of Americans annually out of many billions of dollars.

[142] This results in not only a total loss of the victim's savings, thus creating an additional burden on the social safety net, but also in disruption of the family unit and eventual disenfranchisement.

[143] Tax frauds are the rising star of the scam industry and increasingly pervasive. The sale of materials purporting to magically free U.S. citizens of taxation is seemingly at an all time high.

[144] Recent high-profile prosecutions by the Internal Revenue Service have done little to stem the ever growing tide of tax protesting or the proliferation of abusive trust schemes.

[145] A large, talented, and increasingly sophisticated workforce of multilevel marketers and telemarketers is increasingly making the transition from quasi-legitimate products to the much more lucrative tax fraud business which they capably market on a mass basis.

[146] Tax frauds, like so many other frauds often take advantage of offshore tax savings as a safe and unregulated base of operations to conceal their identities from prosecutors and to hide their ill- gotten gains.

[147] The scam industry is inventing new and more sophisticated scams daily, many of which prey on the paranoid belief systems of Americans who are already disenfranchised, thus creating a negative cycle which feeds upon itself.

[148] Financial frauds are also pervasive and include prime bank scams, advance fee fraud, and business opportunities scams. These scams cause not only direct economic harm and divert scarce law enforcement resources, but also stifle legitimate investments and risk-taking.

[149] Efforts of private groups, such as mine, to warn the public about scams are very valuable. Yet, such sites as ours are outnumbered on a scale of 1,000 to 1 or better by the websites of scam artists who often attack our few private websites and attempt to get them shutdown by denial of service attacks known as "joe jobs", a form of cyber terrorism.

[150] These attacks are made not only by the scam artists directly, but also by the myriad of businesses that richly profit by providing technical support and like services to scam artists. The latter services are the backbone of the industry of scams and provide an invaluable infrastructure of support services, including cheap and anonymous web posting, conference calling, spamming services, and the like.

[151] These services are richly compensated by the scam artists who often have no other overheard and though committing no crimes themselves are economically vested in the success of the scam artists committing their crimes.

[152] The Internet has made the industry of scams more efficient by allowing scam artists to pitch their schemes to the masses while still concealing their identities from investigators. The Internet allows scam artists to engage in campaigns of disinformation and deceit both to deter past victims from reporting their crimes to the authorities and prepare future victims for the next scam.

[153] A full combat against the industry of scams can be joined. Enforcement difficulties and jurisdictional disputes, federal versus State and federal agency versus federal agency must be resolved.

[154] Another factor is an Internal Revenue code that is indecipherable to all but highly trained tax professionals, also a culture of noncompliance fold by 9 and 10-figure corporate tax shelters based on ridiculous but often technically correct interpretations of the code.

[155] Policymakers must consider giving law enforcement greater authority and resources to deal with schemes at their inception, to grab the seed packet of the scam before it blossoms into a garden of defrauded victims. Likewise, those breeding grounds for scam artists, including the owners of Internet bulletin boards who profit by banner advertising, should be made responsible for their conduct to defraud victims.

[156] The Internal Revenue code should be simplified at least as it relates to the direct taxation of individuals. And the culture of noncompliance must be eradicated.

[157] That concludes my statement. Thank you.

[158] The Chairman. Thank you, Mr. Adkisson.

[The prepared statement of Mr. Adkisson appears here on the Senate Finance Committee website.]

[159] The Chairman. Now, Mr. Hodges.

STATEMENT OF JOSEPH G. HODGES, JR., ATTORNEY-AT-LAW, MEMBER AMERICAN COLLEGE OF TRUST AND ESTATE COUNSEL, DENVER, CO

[160] Mr. Hodges. Thank you, Mr. Chairman. I have to be sure that I disclaim any attempt here today to talk on behalf on either the American Bar Association's Real Property Section or the American College of Trust and Estate Counsel. My remarks are purely personal.

[161] The Chairman. Thank you.

[162] Mr. Hodges. I have been in private practice since 1968. And during that period of time, I have specialized primarily in estate planning and charitable gift planning.

[163] And back in the early 1980s, I also became very involved in the use of the Internet by practicing attorneys, particularly attorneys in my area of the profession. And as a consequence of that, I have had hands-on involvement with several websites, including the one that the real property probate and trust law section has on the ABA's main site and the site that the American College has.

[164] As a consequence of that, I have also had occasion to visit many of the sites that the other people here today have spoken about. And I have shared many war stories, if I can say it that way, with JJ MacNab over the last 3 or 4 years about many of these sites. And yet, today was the first time that I have ever met JJ in person. This has all been conducted by electronic mail.

[165] What I think this all shows is that the impact the Internet has today on the proliferation of these tax schemes, scams, and rip-offs is phenomenal. And it is a totally unregulated industry, one that is very difficult to stop unless you have the right enforcement mechanisms in place through the IRS and the various government investigative agencies to put the people who perpetuate these scams in jail.

[166] It is not that the John Q. Public are the ones that are the victims here, except for the fact that they lose the money. They are the ones that pay the huge fees, $10,000, $15,000 for a package of paper that is virtually worthless. And if we do not beef up the enforcement in this regard, I am afraid that tax noncompliance will become the byword of the day.

[167] Interestingly, at least in my profession, the American Bar Association's law practice management section did a study back in March of 2000 called "Lawyers Serving Society Through Technology". And this particular study was a commission that was set up by the president of the ABA.

[168] I outline in my written submission some of the highlights of that report. And I thought I would just mention a couple of them here today, one of which is that there is a distinct possibility that a large segment of the legal profession, mostly solos in small firms, and I myself am a solo practitioner now, could be displaced by competitors providing legal solutions under the category of "legal information services", as opposed to the traditional "legal services" which is what lawyers do.

[169] Perfect examples of this can be found on sites, such as the Nolo Press website where self help is the byword of the day. And people can find all kinds of books and materials there that allow them not only to enter these schemes and scams, but to virtually do every kind of basic legal service that they need without the assistance of proper professionals whether they be lawyers, accountants, financial planners, or whatever.

[170] The report goes on to indicate that legal services seem to be commoditized today and that consumers now have a price choice that is moving away from the traditional hourly rate structure that lawyers are used to and is approaching what they like to call either an option or value-added flat fee approaches, such as prepaid legal plans or websites that offer lawyers direct contacts with the public in terms of being able to search out lawyers and what services they offer.

[171] The report also notes that the ethical framework of legal services by the Internet is currently virtually not there. Now, there must be I think 4 or 5 commissions now in the ABA that have been set up in the last year to tackle that whole issue.

[172] Perhaps, most importantly for lawyers, the report indicates that we are going to face increasing competition from other professionals, including accountants and MDPs which are multiple disciplinary practice firms, many of whom are not subject to the same ethical rules, while the unauthorized practice of law statutes in most States are virtually not enforced. And in some States like Arizona, they do not even exist anymore.

[173] So anyone who wants to get into the business of providing financial products to people and particularly to our elderly citizens is free to do so. And yet, they have no formal training to function properly in that business.

[174] I have also pointed out in my written statement a variety of the living trust scams and schemes that are out there not only in terms of books, but in terms of presentations and seminars that are conducted, and how these have proliferated in trust kits and all kinds of things that are just virtually useless and people pay horrendous sums for.

[175] Most importantly though, I think that my 2 organizations that I belong to have finally come around to the fact that they too need to play a role in educating the public. And they are moving in this direction with deliberate speed at this point in time.

[176] The American Bar section that I am in will be meeting here in Washington in 3 weeks to approve the first phase of its public information part of its website. And the American College, although they have been a little slow in the development of that kind of material, does in fact have their practice committee working actively in this area.

[177] And to their credit, they funded a major production for PBS called Inside the Law. The particular show that they did, it was an hour-long production that was released in May of 2000 called Death and Taxes, an Inside the Law special.

[178] And as of our meeting 3 weeks ago, I learned that the foundation has just funded a second video production with PBS in the same Inside the Law series. And this one will target the scams and things that the elderly people have been subjected to.

[179] In addition, interestingly, the California Bar has a wonderful videotape that they did on scams that the elderly are subjected. And I wanted to make sure that the committee was aware of that. They use money that was obtained from a settlement of the prosecution of one of these scam artists to produce the video. So there is a way to spend the dollars wisely.

[180] So at least from my perspective as a lawyer, I think the bar associations and our related organizations do have a proactive role to play. And we welcome that role and look forward to doing it.

[The prepared statement of Mr. Hodges appears here on the Senate Finance Committee website.]

[181] The Chairman. We thank all of you for your testimony. We will take 5-minute turns now.

[182] Other than what Mr. Sommers told us, he gave us three ideas that the IRS could do, like a strike force to quickly shut down, an information front to educate people, and a PR blitz which would be buying advertising against the tax scammers, what more could the IRS be doing to stop these tax frauds?

[183] And I guess an extension of that, what should the IRS be doing to communicate to the public tax professionals and the press about these scams?

[184] Now, I do not think Mr. Sommers needs to answer that. Maybe, all of you do not need to answer, but those of you that have ideas. Mr. Hodges touched on this a little bit with what the bar is doing, but I am thinking in terms of the IRS.

[185] Yes, go ahead if you want to, Mr. Sommers.

[186] Mr. Sommers. Well, yes, my presentation really dealt with the web-base, shutting down websites and web-based scams. But what about trust scams that are in operation now? What can they do now to attack these?

[187] Well, every one of these scams has a weakness. They need a bank account. They need a taxpayer identification number.

[188] IRS needs to get control of how they issue these taxpayer identification numbers. They need to make sure that these trustees who often de-tax themselves so that they do not have a Social Security number file with Social Security numbers.

[189] They need to actually have a special unit to go over what trust tax identification numbers are being filed so that they can track those trusts and see if tax returns are being paid.

[190] Also, the other escape these people use is they always open up bank accounts that pay no interest because they do not want 1099 forms from the bank going to the IRS. It seems to me that for trust bank accounts, 1099s should be issued regardless of there is interest being paid or not.

[191] In short, the IRS really should follow kind of the "know your customer rules" that apply in the money laundering sense. They should know whether they are creating sham trusts or not or at least be able to track them through the taxpayer identification numbers because that is the entre. That is the ticket into the system. Once they are into the system, they disappear. But they need that access.

[192] The Chairman. Anybody else?

[193] Mr. Hodges.

[194] Mr. Hodges. I just would suggest that a definite possibility that our section of the American Bar Association get together with the Internal Revenue Service with highly trained professionals and explore perhaps in 3 weeks when we are here for a 4 to 5-day meting some of the ways that legally at least that we could do this and assist the IRS from our perspective.

[195] I think that would be a very worthwhile meeting. And I would be more than happy to suggest that to our section leaders.

[196] The Chairman. Maybe, Mr. Rossotti could also respond to that in the next panel.

[197] Ms. MacNab, I think that you wanted to respond.

[198] Ms. MacNab. In particular, they need to go where the promoters go. They need to beef up their own website.

[199] When I called the criminal investigations division about 2 years ago and asked about pure trusts, I was told that there is a .25 million of these plans already in existence. This to me seems to be a crisis.

[200] They do have a criminal investigation website. But when you run a search on pure trust in any of the Internet search engines, the IRS website does not pop up. It is not one of your options. I am sure the computer person here could tell you better.

[201] There are ways to make sure that your website comes to the top of the list. The IRS should be using the same techniques, metatags in particular, to make sure that their website is seen.

[202] If you go through 10 or 15 pages of different websites, all of which say pure trust works, before you get to the IRS website, how many taxpayers are going to have that kind of patience? So they need to make sure that their website gets seen by consumers.

[203] They also produced a wonderful brochure last year on what is a sham trust, what is an abusive trust, what are the warning signs. It was a wonderful brochure. It had lots of information. I do not know of a single taxpayer that has seen it.

[204] The Chairman. All right. Did you want to respond, Mr. Bazar?

[205] Mr. Bazar. One comment or suggestion is that the IRS in their website have an aim more towards people who do not have a law degree. I mean, simplify it a little bit.

[206] The Chairman. All right. That is very good advice for any government agency. [Laughter].

[207] Mr. Bazar. I mean, there are a few standard arguments that all the tax protestors, for example, filing your 1040 is voluntary. I mean, all you have to have is a website that says, you must file a 1040. I mean, very simple things like that, I think that would help greatly.

[208] The Chairman. All right. This will probably have to be my last question on this first round. To any of you, what roadblocks does the IRS face in going after these tax scams, particularly those on the Internet?

[209] Ms. MacNab. I will take this one. I think the biggest roadblock is going to be how easy it is to move money around on the Internet, especially on the offshore. You can move hundreds of thousands of dollars using virtual money right now. And it is totally untraceable.

[210] To give you an example, the con artists are smart. The IRS recently subpoenaed I believe it was American Express and Master card records to find out who had money offshore and was trying to bring it back on by spending using a debit or a Visa card or a Master card.

[211] The promoters have pivoted from that. And now, they issue numbered credit cards. Your name does not appear anywhere on it. It does not appear anywhere in your account statements. How does the IRS know whose card that is?

[212] I think the biggest impediment is going to be getting offshore. It is too easy these days to move money. I have an example in my written testimony about how you can go online and in a period of about 5 minutes, you can sign up for a numbered Swiss bank account with a minimum investment of $200.

[213] Another website which I actually have copies of, the front page of the website in the testimony offers, I think it is, upwards of 60 offshore tax shelters on their website. All you do is point, click, choose which ones you want to buy, put them in your shopping cart, and check out, just like you are buying books at barnesandnoble.com.

[214] It is very easy. This particular website is located in Cypress. It is easy, but it should not be impossible for the IRS to track these people down.

[215] The Chairman. Anybody else before we go to Senator Baucus?

[No response].

[216] The Chairman. Senator Baucus.

[217] Senator Baucus. Thank you, Mr. Chairman. And maybe, you want to work for the IRS. [Laughter]. I mean, you have passion. You want to stop this stuff.

[218] Ms. MacNab. We do want to stop this stuff.

[219] Senator Baucus. And we all do. And I appreciate the intensity of your testimony and how much this bothers you as a good, red-blooded American citizen. I deeply appreciate it. And I know Americans watching will feel the same way.

[220] Why has the IRS not done more, or other appropriate agencies? I mean, you said, it is a wonderful brochure. Nobody has seen it. You have made several telephone calls. Nothing seems to happen.

[221] Why? What is your best guess? Is this because this is all so new, because it is all so newly complicated? Is it because we need all a whole new sort of paradigm of thinking, a whole new set of laws in this Internet age, that we are not there yet? I am curious. What is the problem?

[222] Mr. Hodges. From the legal side, I think you have made a good point. This is a very difficult kind of business to control. The Internet is a free wheeling environment. And it is worldwide.

[223] And we can pass all the laws in the world, in the United States saying you cannot have sites with this, that, or the other material. And that will not do it because people just move offshore and broadcast it back to the United States.

[224] But you can put I think enough legal sanctions in the law for fraudulent and misrepresentation activities. And those are real. Those are consumer laws. They are in every State in the Nation.

[225] The hard part though is when you have a case like this and you go to your State attorney general. And so you get the answer that was alluded to earlier, that is either, we do not have the resources or the time or whatever.

[226] And unless the thing is so egregious that they cannot avoid it, no prosecutions ever occur and no investigation is ever made. And these things just grow and grow and grow.

[227] And if you do shut them down in one State, then they pick up their stacks and move next door to the next State and start up all over again. They change their name usually so that the identity is not easy to see.

[228] But I think the service is finally after many years of basic no action, began to enforce the most egregious cases. But as JJ alluded to earlier, it takes at least 2 years to complete those investigations before the prosecution starts.

[229] And in one particular case that I am familiar with where the fellow had committed the scams in the United States. It was a pyramid scheme. It made millions of dollars. He took the money down to The Bahamas islands and then was finally through the courts held in contempt and put in jail. He went through six months of jail, got out. And he is probably down in the islands again, enjoying his money.

[230] And the court basically told him that he had to tell his trustee to repatriate the money to the United States. And he did not even bother to even to try. And he did not have to. If he was willing to sit in jail for six months, that was his punishment, if you will, for entering a foreign trust scam like this.

[231] And they count on that frustration. They count on the inability of the IRS or any other treasury agency to chase that money down and get it back once it gets out of the country.

[232] Senator Baucus. Mr. Sommers.

[233] Mr. Sommers. Senator Baucus, it does require a new paradigm. Again, from my perspective, I come at this from the consumer fraud standpoint. It needs to be stopped now. People are being ripped off, paying for these.

[234] IRS, they may not know about it until a tax return is filed 12, 18 months after the scam has even happened and they audit. And so in some ways, it is telescoping this upfront. The Federal Trade Commission knows how to do this.

[235] In my perspective, what these people are doing is no different than selling phony diet pills, phony stock investment, or anything else. It happens to deal with tax.

[236] But it is a consumer fraud issue that they can make lots of money on and get out of town before the ramifications are felt because, again, the IRS looks at it from a revenue standpoint. They need tax returns to audit. They need things to see.

[237] Senator Baucus. But with the addition of the Internet, it makes is almost infinitely more difficult from an enforcement point of view.

[238] Mr. Sommers. Well, once they get in the system, I think it makes it very difficult. I think the problem is that maybe IRS has waited for these to filter through the system and then make a big bust somewhere, get the records, and prosecute lots of people.

[239] Well, by that time, we think it is too late because these guys know how to fly under their radar. And they have to get them on the front end.

[240] One observation I would like to make here though, I just cannot resist. We are talking about $300 billion of taxes. And all of us seem to be sole practitioners that are on the combatting side. JJ and I are doing this pro bono. Our websites are all pro bono. We do not make a nickel off of it.

[241] So we have a $300 billion a year loss in taxes being fought by, we have maybe, 5 solo practitioners up here who do not make a dime, but we are the ones out on the front line trying to combat these. So it seems like we are a little over matched here.

[242] Ms. MacNab. We need help.

[243] Senator Baucus. Yes. It is not fair probably to make this next comment because we have not yet heard from the next panel. But I am just going to tell you, listening to the five of you, I have the impression that this is virtually unchecked, these things of kinds, whether the pure trusts or the offshore trusts or what not. This is virtually unchecked. I mean, is that an exaggeration?

[244] Mr. Hodges. No. I think that is an accurate assessment, but I think it is also shows the power of education here could be so significant. And it is the ability of the public to understand going in that these are truly scams.

[245] And how do we get that information to them? I think we try every method we can through organizations, through the IRS websites, through the IRS criminal investigation website, and brainstorm all of the public information as we can do it.

[246] We have in Colorado, our attorney general, Gail Norton who is now the Secretary of Energy, produced this little, back-to-back pamphlet. It is called "Consumer Alert: Living Trust Scams".

[247] Thi