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They advertise on business talk radio. They run infomercials on public access television. They infiltrate your local church. They are the 90's version of the "snake oil" salesman, and they're out to steal you blind. The worst part is that you'll never know it until the IRS comes knocking at your door and by then, the rip-off artist is long gone.
Can you really avoid income taxes by placing your assets in a "Pure," "Pure Equity" or "Constitutional" Trust? What about an "Unincorporated Business Organization?" Has any court ever approved such a trust as a legitimate tax planning vehicle? Does P.T. Barnum's old adage, "There's a sucker born every minute" apply to you? What about convicted tax felon Irwin Schiff and his "Zero-Income" scam, or the "Foreign-Source Income" nonsense being peddled by Thurston Bell and his cohorts? Read the following articles before you fall prey to tax and trust scam artists.Check out the Tax Prophet's New Website: Son of Boss - Abusive Tax Shelter Transaction
The son of Boss website uses this infamous tax shelter to explain how our tax code has been manipulated by some of the sharpest and most devious minds in the country. It serves as a portal for the son of Boss cases as they are decided and provides key IRS documents. In addition, the website contains illustrations of how tax shelters generally work and a non-technical description of the son of Boss tax shelter in particular.
April 5, 2001 -- Tax Prophet Testifies at Senate Finance
Committee Hearing Regarding Tax Fraud on the Web.
At a hearing reported by major new organizations, Robert Sommers testified before the U.S. Senate's Finance Committee. Mr. Sommers spoke about the "pure trust" tax scam and how the web has increased the number of con artists promoting it. Parts of his testimony appeared on CNN news and in the New York Times. His written testimony is contained in the April, 2001 and May, 2001 Hot Topics. See CNN's coverage of the hearings. (video clip).
Quatloos contains the Tax_Protesters Forum, a must read for those interested in obtaining current postings, information and opinions regarding the latest tax and trust scams. The forum contains entertaining and sarcastic debates between attorneys and professionals who denounce the various scams posted in the forum and the tax scam promoters who defend them. Just click on the link "Tax Protestors, Pure Trusts, and Other Stupid De-Tax Schemes & Scams."Honorable Mention: Why You Shouldn't Trust National Trust Services - another great anti-scam trust website.
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For the latest Justice Department press releases involving civil tax cases, check out the Tax Division's Tax Enforcement News.February, 2009 - Swiss Bank Admits to Massive Tax Fraud
UBS, the largest bank in Switzerland, admitted criminal tax misconduct regarding thousands of U.S. taxpayers. Read about it in my February, 2009 newsletter.January, 2009 - Largest U.S. Companies Use Offshore Tax Havens
According to the Government Accountability Office, 83 of the 100 largest publicly-traded corporations and 63 of the 100 largest federal contractors maintain offshore subsidiaries in 50 tax havens. Many recipients of tens of billions in federal bailout money maintain hundreds of offshore subsidiaries in tax havens, including Citigroup (427 subsidiaries in tax havens), Morgan Stanley (273), and Bank of America (115).December, 2008 - Lynn Meredeth Loses Her Damage Claim Against IRS Agents
Notorious tax protester Lynn Meredith is serving a long prison sentence for her tax evasion antics. But that didn't stop her from suing the IRS agents who conducted the intial raid on her home and business. Unfortunately for Meredith, the 9th Circuit Court of Appeals rejected her claims, noting that the federal agents acted within their scope of authority and were not subject to a civil suit.
Thus, another tax-protester tactic of suing the agents who bust you bites the dust. No instant riches for Meredith, just jail time.December, 2008 - The Madoff Scam - Tax Relief for Victims?
Check out my December newsletter that discusses the relief available for victims of the Bernie Madoff Ponzi scheme.November, 2008 - Attorney Convicted of Hiding Money For Clients
Attorney Thomas Wood used various client trust accounts to hide money from IRS and was convicted of violating Internal Revenue Code Section 7212(a) (obstructing and impeding the due administration of the tax laws). Mr. Wood's clients were indicted on federal tax crimes. He deposited approximately $11 million in various trust accounts and then spent $6 million to pay for his clients' personal expenses, as well as his own.
Although Mr. Wood did not assist his clients in the preparation of false tax returns, it was still a crime for him to hide money on behalf of his clients while they were facing criminal tax charges.November, 2008 -Swiss Banker Indicted for Massive Tax Fraud
Swiss banker Raoul Weil was indicted in Florida for conspiring to defraud the U.S. by hiding approximately $20 billion in assets in off-shore and secret accounts. The enormous fraud involved nearly 20,000 U.S. taxpayers and generated about $200,000,000 in profits for the Swiss Bank. The scam was carried out from 2002 to 2007.
Clearly, this is the largest tax fraud ever uncovered and raises the prospects that there has been a colossal rip-off of the tax system by some of the largest banks in the world.May, 2008 -Big-Time Bankers Indicted for Tax Evasion
Switzerland is known for its secret bank accounts, but that did not stop the U.S. government from indicting Bradley Birkenfeld and Mario Staggl for tax evasion, two big-wigs who worked for UBS (the largest bank in Switzerland). The indictment alleges that Birkenfeld and Staggl provided tax-evasion schemes to California real estate billionaire Igor Olenicoff.
The bankers are charged with assisting Olenicoff with the evasion of taxes on $200 million of income, by hiding the funds in secret accounts located in the United Kingdom, Switzerland, and Liechtenstein, and filing false Swiss bank documents and other IRS forms to conceal taxable U.S.-source revenue received by Olenicoff.
Liechtenstein is squarely in the IRS gun sites after a massive tax fraud scheme was uncovered by German tax authorities. According to Forbes magazine, Olenicoff is one of the country's richest individuals, with assets worth $1.7 billion.April, 2008 - Wesley Snipes Is Headed for the Slammer
In a huge victory for the government, action hero and convicted tax cheat Westley Snipes will be spending the next three years at Club Fed. Today, a federal judge sentenced him to the maximum prison term allowed by law. Snipes' high-priced legal team failed to persuade the judge that the actor deserved probation.
In addition to prison time, Snipes still owes about $15 million in taxes, plus penalties and interest. He paid $5 million before the sentencing hearing, but the government called that jesture a granstanding move amounting to just a fraction of what is owed.April, 2008 -Tax Protesters Are Now Called "Tax Defiers"
Leave it to IRS to take a perfectly acceptable description of those who think they do not have to comply with their tax obligations, tax protesters, and change it to tax defiers. At least the new buzzword rhymes with liars!
In any event, with a brand-new mission, the National Tax Defier Initiative (TAXDEF), IRS has announced it is targeting tax defiers with renewed vigor. According to IRS, the poster child is Pinnacle Quest International, an organization that allegedly markets tax schemes nationwide with 830 sales people and serves as an "excellent example" of how TAXDEF will rely on civil injunctions, instead of criminal prosecutions, to shut down scam artists quickly.
Regardless of the initiative, the movement formerly known as tax protesters is not disappearing; with TAXDEF, IRS hopes to drastically curtail their ability to peddle their bogus snake oil schemes to large groups of gullible, naive or dishonest taxpayers.March, 2008 -Tax Evasion Japanese Style
Here's a novel way to hide a $58 million inheritance from the tax authorities: Convert the assets into cash, stuff the cash in cardboard boxes and paper bags, then build a shed next to your home to stash the cash. This is the alleged scheme hatched by Hatsue Shimizu and Yoshiko Ishii of Osaka, Japan and heirs to their father's banking and real estate business, according to Japanese authorities. So far, prosecutors have hauled 50 cardboard boxes brimming with Japanese currency.
In true American style, Ms. Shimizu denied the cash was from an inheritance, claiming she earned the money herself.February, 2008 - Liechtenstein Tax Cheats Busted
Think it is safe to hide your assets in a tax-haven like Liechtenstein? Think again! IRS is going after 100 potential U.S. tax evaders who hid assets in Liechtenstein, a tiny country nestled in the mountains between Switzerland and Austria and long-time refuge for European tax cheats.
In 2006, German intelligence services paid nearly $7 million for secret bank data stolen by a former employee (purportedly a computer expert) of the LGT Group, a Liechtenstein bank. IRS received information from the same informant without payment. Under U.S. law, the informant could receive a sizable reward based on the amount recovered by IRS.
The LGT Group case clearly highlights the problem with banking in a so-called secrecy jurisdiction: Your personal information may be sold for big bucks to your home government and you could land in the slammer for a long, long time.February, 2008 - Taco Bell Kingpin Guilty of Tax Evasion
Run for the border! Karl James, who once owed 50 Taco Bell franchises in Southern California and Arizona, will be spending 36 months in the slammer for bankruptcy fraud and tax evasion. In addition, Mr. James must pay $1.17 million in delinquent taxes to IRS.
James failed to report more than $3.0 million in funds stolen from his company, thereby evading taxes of over $1.0 million. James' actions give new meaning to Taco Bell's slogan, "Think outside the bun!"February, 2008 - Actor Snipes Acquitted of Felony Tax Charges
Wesley Snipes, the famous international movie star, was acquitted of felony tax fraud and conspiracy charges, but was found guilty of three misdemeanor charges of failing to file tax returns. Snipes failed to file tax returns or pay taxes on $58 million of income from 1999-2004. Snipes' two co-defendants, Eddie Ray Kahn and Douglas P. Rosile, were found guilty of the felony charges.
Although the verdict is a victory for Snipes, he still faces a maximum of three years in prison for the misdemeanor convictions, as well as repayment of all taxes, penalties and interest on his back taxes, a sum that could total $35 million.January, 2008 - The Snipes Trial
The trial of actor Wesley Snipes -- the most celebrated criminal tax case since the conviction of Leona Helmsley 19 years ago -- is in underway in Oscala, Florida. Snipes, indicted on felony tax fraud and conspiracy changes, refused to file tax returns or pay taxes on more than $58 million during tax years 1999 through 2004. His co-conspirators, notorious tax protestors Eddie Ray Kahn and Douglas P. Rosile, are founders of the tax protest group originally called American Rights Litigators.
Thus far, the evidence shows that Snipes claimed the tax code did not apply to him, failed to withhold taxes from his employees' paychecks and attempted to pay his taxes with several worthless "bills of exchange" totaling $14 million, drawn on a fictitious bank account.
He also wrote a threatening letter to government officials, attaching 600 pages of tax protester gibberish, and filed for $7 million refund on taxes paid in 1997, claiming the tax code did not apply to him.
Snipes' witness list includes Sylvester Stallone, Goldie Hahn and Barbara Walters. It should be interesting to hear what they have to say about tax fraud. For the latest information on the trial, check out The Snipes Trial.November, 2007 -- Institute of Global Prosperity Co-Founder a Tax FelonI
Not content to earn millions from peddling phony trusts and tax evasion scams, David Struckman, co-founder of the Institute of Global Prosperity (IGP) decided to conceal his ill-gotten earnings by using the same bogus entities he was peddling. The jury was not impressed: Mr. Struckman was found guilty of tax evasion and conspiracy to defraud the U.S. He now faces up to 20 years in the pokey, plus a $1 million fine.
Struckman hid his millions in IGP profits by using phony trust arrangements, sham entities and by going off-shore with his banking. He then used foreign bank wires and debit cards to spend his loot in the U.S.
IRS spokesperson Eileen Mayer summed up IGP's business plan as follows, "Trusts established to hide the true ownership of assets and income for the purpose of committing tax evasion isn't tax planning; it's criminal activity."October, 2007 -- Tax Protestor Sherry Jackson Convicted
On Halloween day, it took a jury about one hour to convict ex-IRS revenue officer turned tax protester, Sherry Peel Jackson, on four counts of willful failure to file tax returns. Jackson, an outspoken leader of the tax protester movement who, despite her training with IRS, claimed as her defense to the charges that she did not believe she had to file tax returns! Clearly, the jury had no trouble dismissing Ms. Jackson's lame defense.September, 2007- Top Gun Investment Guru - A Long-Time Tax Cheat
For 29 years, Richard Josephberg, a financial tycoon who ran his own investment firm, failed to file tax returns or pay taxes, while building his dream home and living the high life. He was convicted of cheating the government of at least $7.0 million in taxes and suffered the first criminal conviction for failure to pay the nanny tax on his household employees.
Mr. Josephberg was so slimy that he surreptitiously reported income under the name of one of his minor children, thus sticking her with a huge tax bill. Mr. Josephberg got 50 months in the slammer.August, 2007 - Robert Schultz - One of the Last-Standing Tax Protesters - Silenced
With most of the major tax scam artists already in prison, Robert Schultz stands out as a major tax protester still on the loose. However, his website, givemeliberty.org, can no longer peddle its frivolous arguments regarding the tax laws and how to stop paying taxes, according to a court order issued by a New York judge.
Get this: Schultz was also ordered to turn over to the government the names, telephone numbers and e-mail addresses of all website customers who received information from the website. To all those gullible, na´ve or just plain stupid tax cheats who thought that Schultz protected them from the mighty taxman, good luck sleeping at night, knowing that your personal information will soon be in the hands of the feds.July, 2007 - Score One for the Tax Protesters - Tom Cryer Beats the Rap
Tax Protestor Tom Cryer, an attorney with a history of mental problems, was acquitted by a jury of failing to file tax returns. The government failed to prove beyond a reasonable doubt that Mr. Cryer knew that he was committing a crime. Of course, Mr. Cryer will still owe the unpaid taxes, plus penalties and interest, but he will not be spending time behind bars. Nevertheless, the tax-protester movement will undoubtedly claim victory over the vicious government and proof their tax scams have merit.
It is ironic that whenever a tax protestor is acquitted (it happens once every several years), the tax-protester movement claims the justice system works, but whenever one of them is convicted, they claim the court system is nothing but a tool for the government.June, 2007 - Civil Rights AttorneyYagman Convicted of Tax Evasion
Celebrated civil rights attorney, Stephen Yagman, known for his pursuit against police brutality, was convicted of tax evasion, money laundering and bankruptcy fraud. He was charged with hiding assets and laundering money to evade $200,000 in taxes. Yagman countered that he was selectively prosecuted for his aggressive representation of clients against the FBI and IRS, a charge the jury evidently dismissed.May, 2007 - Four E&Y Big-Wigs Indicted on Major Tax Crimes
Four former and current partners of the international accounting firm Ernst & Young have been indicted for conspiracy, obstruction of the Internal Revenue Service, false statements and tax evasion. The partners worked for the tax shelter development wing of Ernst & Young, which catered to wealthy individuals with taxable income generally in excess of $10 million to $20 million, who were looking to reduce their taxes by using complex and bogus tax schemes.
The individuals charged are Martin Nissenbaum, national director of Ernst & Young's personal income tax and retirement planning practice; Ernst & Young tax partner Richard Shapiro; and former Ernst & Young tax partners Robert Coplan, an ex-IRS tax attorney, of Plano, Texas; and Brian Vaughn, of Calhoun, La.
The E&Y firm was not indictrf, but remains under criminal investigation for its role in promoting fraudulent tax shelters.May, 2007 - Superstar Lawyer Breached His Duty by Recommending a Dubious Tax Shelter
According to an article in the Wall St. Journal, a recent jury verdict in New York, Jonathan Blattmachr, tax counselor to the Gettys and Rockfellers, breached his fiduciary duty to his client with respect to recommending a suspect estate-tax shelter strategy involving split-level life insurance, a strategy later attacked by IRS as bogus. However, no damages were awarded since the breach of fiduciary duty was not considered a substantial cause of the damages suffered by the client.
Nevertheless, if this can happen to such an illustrious tax superstar, all attorneys promoting tax shelters should be seriously concerned about their fiduciary obligations toward their clients.April, 2007 - The Tax Consequences of the Current Stock Option Backdating Scandal
Hundreds of public companies are implicated. Read about the controversy: Tax Consequences of Stock Option Backdating - a memo.
April, 2007 - More Than One Hundred Jackson Hewitt Franchises Accused of Massive Tax Fraud
The U.S. Department of Justice has evidently uncovered a massive, well-orchestrated tax fraud involving 125 Jackson Hewitt tax preparation franchises and has filed court documents to shut them down. News of the government's action sent Jackson Hewitt's stock price crashing.
The franchises, located in Detroit, Atlanta, Chicago and Raleigh-Durham, are accused of falsifying more than 100,000 tax returns (approximately 2.8% of all returns prepared by the company nation-wide), and causing $70 million in lost taxes. Jackson Hewitt is second in size to H&R Block in the tax-preparation field.
The franchises are accused of fabricating expenses and doctoring W-2 wage statements, as well as claiming "absurd" amounts of fuel credits. Apparently, this is a reoccurring theme with Jackson Hewitt. According to the government, 230 outlets have been shut down since 2001 for filing fraudulent returns.March, 2007 - Notorious Tax Shelter Law Firm Goes Out of Business
Jenkins & Gilchrist, the national firm that got fined $76 million in federal civil penalties for its developing and marketing fraudulent tax shelters, is throwing in the towel, thereby side-stepping potential criminal prosecution for its conduct.
The 600+ attorney firm, with major offices in Dallas and Chicago, worked hand in glove with KPMG, the mammoth international accounting firm that agreed to a $456 million penalty as part of a deferred prosecution agreement stemming from a criminal case involving illegal tax shelters. In addition, Jenkins and Gilchrist faces dozens of civil lawsuits from disgruntled former clients and has already paid millions in civil settlements.
According to federal prosecutors: "Jenkens & Gilchrist lawyers designed, sold, implemented and provided legal opinions for illegal tax shelters....These fraudulent cookie-cutter shelters purported to generate well over a billion dollars in tax losses and eliminate hundreds of millions of dollars in taxes owed by wealthy clients.
March, 2007 - Trust Scam Artists Hijack a Bank and Receive Stiff Prison Sentences
Unbelievable, what chutzpah! First Mountain Bank in Big Bear Lake, California was commandeered by tax scam artists, Defendants Dennis Shollenburg, Hazel Hagy, and Thomas Miller, all of whom operated the Freedom Education Center. The Center sold fraudulent "pure trust" documents and other anti-tax propaganda to its tax-evading clients and then used First Mountain Bank to facilitate the tax evasion schemes perpetrated by the Defendants. The Bank issued phony tax identification numbers to hide the identities of the tax evaders.
The government claims the scheme involved $11 million in deposits. The defendants were sentenced to prison terms ranging from 44 months to 21 months.February, 2007 - IRS Initiative Regarding Stock Option Backdating
IRS has a new initiative (IR 2007-30) allowing employers to pay the additional taxes incurred by rank and file employees caused by the company's backdating of stock options during 2006.
IRS intends the program to minimize compliance burdens on employees who are not corporate insiders while collecting the additional taxes due. Under the program, employers will not report the additional taxes on the employee's W-2 and the employee will not be obligated to pay the additional taxes.
Employers must submit a notice of intent to participate in the program by February 28, 2007.January, 2007 - 9th Circuit Says Taxpayers Must Investigate Tax Shelters
The 9th Circuit upheld the Tax Court's imposition of negligence penalties on taxpayers, who had invested in cattle breeding partnership tax shelters, for understating their tax liability. Taxpayers, a married couple, failed to investigate the legitimacy of the tax benefits through an independent source, even though the promotional materials clearly indicated that there were substantial tax risks and warned investors to seek their own tax advice.
Further, taxpayers never verified their individual tax returns and share of partnership losses, never conducted any independent investigation nor did they seek independent advice when the IRS sent them numerous warnings regarding the propriety of the deductions they were claiming.The lesson: Taxpayers have an affirmative obligation to investigate and obtain independent verification regarding the legitimacy of tax shelter deductions. Taxpayers should exercise due care when filing their tax returns, otherwise, they can face negligence penalties, along with additional taxes and interest.January, 2007 - Using "Seinfeld" Analogy, IRS Claims Victory over LILO and SILO Tax Shelters
Referring to a recent IRS court victory, BB&T Corporation, DC N.C., 2007-1 USTC 50,130, unveiled its new "Seinfeld" analogy, that is, the underlying transactions in BB&T were similar to what television's Seinfeld show specialized in - "being about nothing." "BB&T is an example of a tax-motivated transaction in which nothing happened," IRS explained. The BB&T decision will "set the tone" for dealing with remaining LILO (lease-in/lease-out) and SILO (sale-in/lease-out) cases in its current inventory, since the facts in BB&T were essentially the same as in other LILO and SILO shelters.
The court in BB&T held that a financial services company was not entitled to interest and rent deductions associated with the company's participation in a lease and sublease transaction of wood pulp manufacturing equipment that it entered into with the manufacturer that owned the equipment, claiming there was no genuine indebtedness.
IRS is currently dealing with a LILO and SILO inventory of 50 different shelter packages involving 500 total open tax years and over 1,500 separate taxpayers.October, 2006 - 91% Conviction Rate for Tax Crimes
IRS's conviction rate, including guilty pleas, is now 91 percent higher than the average over the past decade. Average sentences increased by 6 months to 46 months although the average for tax crimes not involving illegal activities is 17 months. More than 2,700 special agents work on ferreting out tax crimes. IRS is spending about 50% of its efforts focusing more on international tax fraud and tax shelters, crimes from legal sources of income, and the balance on tax crimes stemming from illegal activities, mostly the drug trade.October, 2006 - Wipe-Out! Surfing Superstar Busted for Tax Evasion
Surfing champion Sunny Garcia, who won more than $1,000,000 in surfing competitions, evidently "forgot" to pay taxes on taxes on more than $417,000 in prize money . His omission will cost him three months at club Fed and seven months of home confinement (channel surfing only). He is also required to fully pay his taxes and penalties to IRS.
No hard feelings, according to Garcia, "I feel good, considering," he said. "It's a weight off my shoulders.October, 2006 - Wesley Snipes Indicted
Actor Wesley Snipes, a Hollywood tough-guy, has been indicted on federal criminal charges for filing fraudulent refunds seeking $12 million in refunds on taxes he paid in 1996 and 1997, and failing to file six years of tax returns. Snipes was caught using the bogus tax protestor argument that his income was "not from a taxable source," based on the discredit rantings of Larkin Rose and his infamous Section 861 argument (only foreign source income is taxable).
According to the indictment, Snipes conspired with Eddie Ray Kahn and Douglas Rosile, a former CPA in the tax scam. Kahn, founder of a Florida company, which investigators allege promoted and sold fraudulent tax schemes to gullible and greedy hotshots like Snipes.October, 2006 - Former Tyco Exec Busted for Filing a Bogus Corporate Return
Raymond Scott Stevenson, Tyco's former Vice-President in charge of taxation, managed to get himself charged with intentionally failing to report more than $170 million in income on Tyco International Ltd.'s 1999 corporate tax return. Stevenson directed a series of transactions designed to reduce Tyco's state tax liability, and in so doing, about $170 million in federal capital gain was incurred by Tyco.October, 2006 - Wealthy CT Taxpayer Admits Filing False Returns
Robert Brinkman, of Easton, CT, another rich guy who should know better, pleaded guilty to filing false tax returns and a stolen property charge. Brinkman filed a tax return reporting income of $5,090 for 2003 when he actually earned $2.7 million and sought tax refunds of more than $600,000. Evidently, Brinkman fancied himself as a tax protester who believed his compensation was not taxable, despite 90 years of court cases uniformly rejecting such nonsense.October, 2006 - Attorney Purchases Business Using Drug Dealer's Cash
Attorney Stephen J. Plowman evidently took the concept of "money laundering" literally, and purchased a laundromat to cleanse his client's ill-gotten gains. Plowman received cashier's checks totaling about $56,000 and another $120,000 in cash from his drug-dealing client who wanted to purchase a laundromat as a means to launder his cocaine trafficking profits. Plowman purchased the business using $100,000 in cash, but "forgot" to file the proper forms regarding the cash portion of the purchase. Worse, he listed the purchase price as $60,000, the amount paid for the business by check.August, 2006 - Tax Declared Unconstitional Under 16th Amendment
In a bombshell opinion, Murphy v. IRS, (a suit involving whether damages received for emotional distress was income for tax purposes), a three-judge panel of the D.C. Circuit Court of Appeals concluded that that tax-code section 104(a)(2) -- which permits a tax exclusion for physical personal injuries only -- is unconstitutional under the 16th Amendment. The court used an "original intent" analysis, championed by conservative Supreme Court Justice Antonon Scailia, to conclude that the drafters of the 16th Amendment did not consider emotional distress damages as taxable income.
Tax Protesters who believe that wages are not taxable under the 16th Amendment should have renewed vigor in pressing their frivolous claims. Of course, nothing in Murphy v IRS remotely suggests that wages are not taxable.July, 2006 - IRS Sacks Its Estate-Tax Auditors
If the administration cannot kill the estate tax through Congressional repeal, it will do so by eliminating the IRS's ability to audit gift and estate-tax returns. According to IRS, for each hour an estate tax attorney works, the service recovers $2,200 in taxes. Nevertheless, IRS is poised to eliminate 157 of the agency's 345 estate tax lawyers, plus 17 support personnel, according to a recent article in the New York Times newspaper.July, 2006 - Stock Option Back-Dating Task Force
IRS and the U.S. Attorney's Office are combining resources to attack "stock-option backdating" by major corporations, the majority of whom reside in Silicon Valley. Evidently, corporations backdated stock options issued to their executives at the low point of the stock's price, thereby unfairly increasing the chances the stock would rise in value. This could be the next major corporate scandal - stay tuned.June, 2006 - IRS Targets Small Businesses
To close the estimated $345 billion in uncollected annual tax receipts (the "tax gap"), IRS has pinpointed small businesses and the self-employed, as the major culprits. IRS claims that a whopping 43% of the tax gap can be traced to this group.
According to California's Franchise Tax Board (FTB), restaurants were the worst offenders, with levels of non-compliance between 55% and 60%. Used car dealers were next with levels between 45% to 55%, followed closely by auto repair shops at 40% to 50%. Rounding out the list were landscaping companies with 35% to 45% non-compliance.June, 2006 --Congress Effectively Kills Offers in Compromise Program
The IRS's Offer in Compromise program permits taxpayers to compromise their tax liabilities if they lack the financial assets and income to fully pay their taxes. However, the new law requires a non-refundable payment of at least 20% for a lump-sum offer. For an offer based on installment payments, taxpayers must now pay tax installments while IRS considers the offer.
Most taxpayers borrow funds from reluctant friends or family members (so-called "friendly lenders") once the offer has been accepted by IRS. Requiring a 20% non-refundable payment before IRS will consider the offer effectively eliminates funding by friendly lenders, since they now risk losing their money without any assurance that IRS will accept the offer.May, 2006 --Richard Hatch - 51 months in the Pokey
Television's first "Survivor", Richard Hatch, was sentenced to 51 months in the slammer for evading taxes on more than $1.4 million of income, including his $1 million prize money for his Survivor performance. The Justice Department could not resist taking a shot at the bug-eating Hatch. "Our nation's federal tax system is not a reality show to be outwitted, it is a reality, period," said Eileen J. O'Connor, Assistant Attorney General.May, 2006 -- CPA Acquitted of Criminal Tax Charges
Paul Petrino, a tax preparer who used tax-protestor arguments in the preparation of his clients' tax returns, was acquitted by a jury of aiding and abetting false tax filings. Petrino claimed that wages were not taxable, a standard refrain sung by tax protestors, which has been rejected by every court dealing with the issue.
The jury found there was reasonable doubt that Petrino intentionally violated the tax laws. Apparently, Petrino successfully used the "Cheek" defense in which a defendant claims that he held a good faith, but mistaken belief about what the law requires, whether or not that belief is objectively reasonable.
This may be the first case in which a criminal case involving tax protestor arguments resulted in an acquittal, although the Vernice Kuglin case (see Hot Topics, August 2003) resulted in an acquittal of a tax protestor who claimed to IRS that she thought the payment of taxes was voluntary. In any event, acquittals of tax protestors are extremely rare.March, 2006 -- IRS Launches Major Offensive Against Frivolous Returns
IRS has fired a shot over the bow of tax protestors and others promoting frivolous arguments who think they are immune from federal income taxes. These IRS rulings address the latest batch frivolous arguments put forth by unscrupulous promoters and their naive, gullible, stupid or just plain greedy, herd of followers.Notice 2006-31: This Notice updates Notice 2005-30, IRB 2005-14, 827 and lists the grab-bag of worthless tax-protestor arguments and excuses for not paying income taxes. Rev. Rul. 2006-17: Inserting the legal phrase "nunc pro tunc," has no legal effect on the filing of a tax return or the information contained therein. This term, which means "now for then" is a legal term used to correct an error in a court order. Rev. Rul. 2006-18: This ruing addresses the tired tax-protester argument that only federal employees and persons residing in Washington, D.C., or federal territories and enclaves are subject to the federal income tax system. Rev. Rul 2006-19: This involves the continuing effort by tax scammers to shift their income into sham trusts to evade taxes. Rev. Rule 2006-20: This deals with claims that Native Americans are exempt from taxation. Rev. Rule 2006-21: This attacks with another tax-protester argument that federal tax return forms are defective.February, 2006 -- King of the Tax Protesters Receives a "Life-Sentence"
Irwin Schiff (aka "Schifty") age 78, who publicly challenged U.S. tax laws through his Las Vegas radio show, and his numerous appearances on television and national talk shows, effectively received a life sentence for his third felony conviction as a tax evader. The numbers: (i) 163 months (13.5 years) in the slammer; (ii) 3 years supervised release; (iii) $4,265,249 restitution; and (iv) $1,300 in special assessments.
Evidence at trial showed that Schifty earned approximately $4.2 million from the sale of his tax-scam products and evaded approximately $2.0 million in taxes by hiding income in offshore accounts and using others to front for him. The judge's take on Schifty's schemes: "There is more evidence of the validity of the tooth fairy than there is of this tax theory."
At sentencing, Schifty claimed he was an innocent man, being persecuted by a fascist government in order to hide the truth from the American people. The judge was not impressed noting, "Of all those who participated in this scheme, only Schiff made money. And in all other things in his life prior to this scheme, he was a failure in his life."
January, 2006 -- Nomination for Tax Protester of the Year
If the Darwin awards were issued for most self-destructive act by a tax protester, James McBride would win hand's down. Not satisfied with the typical ploys of filing bogus liens on judges, McBride has taken tax-protester stupidity to a whole new level.
McBride's girlfriend gets convicted for tax evasion. He then uses checks from her closed checking account to pay the property taxes of the presiding judge, his girlfriend's attorneys and the IRS agent involved in investigating the case. Now for the clever part: McBride then files involuntary petitions in bankruptcy against these individuals, claiming they all owe him money for the tax payments made with the bogus checks! He then pays for the bankruptcy petitions with the same worthless checks!
McBride gets himself convicted of a variety of crimes, including bankruptcy fraud and is sentenced to 78 months in prison.
November, 2005 -- Tax Shelter Malpractice Threat
Prompting the civil litigators to follows its lead, IRS Chief Counsel Donald Korb, in a Palo Alto, California presentation, encouraged malpractice lawsuits against those promoting tax scams. Of course, such lawsuits benefit IRS by causing tax-shelter promoters pain without IRS having to spend its resources. Korb speculated about a "marketplace response" -- malpractice suits -- to tax shelters, which he called the "100,000-pound gorilla that's overlooking all of the tax professionals today."
The federal government, by making KPMG admit to criminal conduct with respect to its tax shelter program, is providing ammunition to those wronged by the accounting firm's actions. Korb hopes that by holding tax scam promoters accountable to their victims, the risk to these promoters will outweigh the lust for easy profits.
November, 2005 -- Tax Scam Promoter "Judge Rizzo" To the Slammer
John J. Rizzo was sentenced to 43 months in prison followed by three years of supervised release in connection with a tax evasion scheme promoted by the nefarious "Institute of Global Prosperity" (Global Prosperity). Rizzo, a former municipal court judge, and Global Prosperity pitchman, earned more than $4 million by appearing at the Global Prosperity tax scam sessions dressed in judicial robes and bragging that he was a former judge and expert on tax law.
Rizzo plead guilty to conspiring to impede and impair the IRS in the ascertainment and collection of income tax and willfully failing to file a federal income tax return for 2000. He also pleaded guilty to felony charges of willfully aiding and assisting in the preparation of a false income tax return and perjury before the grand jury.
Paul K. Charlton, U.S. Attorney for the District of Arizona noted the irony in a felon called Judge Rizzo, "It is tragic when a former member of the judiciary, charged with upholding the law, encourages others to violate those laws."
November, 2005 -- Amazon Nixes Negative Reviews of Tax Protestor Book
Here's the situation: A tax protester writes a book containing the typical nonsense about our tax system that has been rejected by every court that has heard these arguments for the past 85 years. The book is posted on Amazon.com and the author's buddies send in glowing reviews, even though following the author's advise can lead to long prison sentences since tax evasion is a federal crime. When those with knowledge of how the tax system really works write critical comments disparaging the book, which side does Amazon.com take?
Apparently, Amazon.com sides with the author and removes the critical comments, thereby allowing the lies and distortions of the author to go unchallenged. According to J. J. MacNab, a prominent critic of the tax-protestor movement, "by leaving up only five-star reviews and removing the negative ones, Amazon is siding with the tax protesters." MacNab posted an unfavorable comment about the book "Cracking the Code: The Fascinating Truth About Taxation in America," a self-published book by tax-protester Peter Eric Hendrickson and Amazon.com promptly removed MacNab's comments. Once the New York Times made inquiries regarding Amazon.com's censorship policies, the negative comments evidently were restored.
November, 2005 -- Congressman Guilty of Tax Evasion
Republican Congressman Randall Cunningham plead guilty to tax evasion stemming from a bribe he received from a Pentagon defense contractor while sitting on the House defense appropriations committee. The defense contractor purchased Cunningham's residence for $700,000 over the market value, as a bribe to receive Pentagon contracts. Cunningham's failure to report this income led to tax evasion charges.
October, 2005 -- New IRS Tax-Shelter Initiative
IRS will offer an initiative for taxpayers to confess their sins by January 23, 2006 for their participation in abusive tax shelters until January 23, 2006. Announcement 2005-80 describes 21 tax shelters eligible for settlement, including a variety of schemes involving employee benefits, charitable remainder trusts, offsetting of foreign currency option contracts, debt straddles, lease strips and certain abusive conservation easements. The settlement terms include full payment of taxes and interest, and a reduced payment of penalties, depending on whether taxpayers properly disclosed the transaction or received a tax opinion from an independent professional.
"People entered into these deals often at the behest of lawyers and accountants peddling flaky tax products," said IRS Commissioner Mark W. Everson. "Times have changed. IRS has acted to shut down these deals, as has the Congress, in passing stiffer disclosure requirements and promoter penalties last fall. We're offering taxpayers a quick, quiet and cost effective way to put these deals behind them."
October, 2005 -- Tax-Protester Irwin Schiff a Three-Time Loser
Irwin Schiff, the most notorious tax protester in history, was convicted for the third time for tax crimes by a Las Vegas court. This time around, he was convicted on 13 tax-related charges and immediately tossed in jail. He faces a maximum sentence of 43 years and a $3.25 million fine.
Schiff, age 77, a self-proclaimed expert on taxes, but called a con-man by the government, made a career and an estimated $4.2 million publishing books, including "The Federal Mafia: How the Government Illegally Imposes and Unlawfully Collects Income Taxes" and "The Great Income Tax Hoax: Why You Can Immediately Stop Paying This Illegally Enforced Tax".
Schiff's girlfriend, Cynthia Neun, 52, was found guilty of 15 out of 16 charges, including conspiracy, tax evasion, aiding in the filing of fraudulent tax returns, Social Security disability fraud and theft of government property. She faces up to 50 years in prison and $3.3 million in fines.
Schiff was convicted in 1980 of two counts of failure to file income tax returns and in 1985, of three counts of tax evasion and one count for failure to file. He was imprisoned for a total of four years.
August, 2005 -- National Trust Services Honchos Arrested
Leroy Fritts and Roderick Prescott, the infamous masterminds behind National Trust Services (NTS), a company that sold "pure trusts" and other tax scams nationwide in the 1980s and 1990s, were each indicted by a San Francisco grand jury on two counts of tax evasion and one count of conspiracy to defraud the United States. The NTS pure trust promotions have been widely imitated by a new breed of fraudsters peddling their wares on the Internet.
NTS packages consisted of several layers of phony trusts that supposedly hide income and expenses from IRS. Samuel Fung, a cohort of Fritts and Prescott, was also indicted for aiding and abetting in the preparation of 19 false and fraudulent Forms 1040 and 1041 between 1998 through 2001.
August, 2005 -- Larken Rose Cooks His Own Goose - Guilty on All Counts
Larken Rose, a medical transcriptionist by training, who gained notoriety as a tax-protester by publicly challenging the government to prosecute him for his tax crimes, got his wish and what he deserved, when a jury convicted him of on five counts of willfully failing to file tax returns. Rose, ignoring the adage, "A person who represents himself has a fool for a client," charged ahead without legal counsel, convinced he could persuade a jury that his bizarre and frivolous views of the tax code were correct. It took the jury about 90 minutes to convict him on all counts.
Rose's conviction is a major blow to the followers of his goofy IRC Section 861 argument that only foreign-source income is taxable, a position that has been uniformly rejected by every court that has ruled on the issue. According to the trial judge, the length of time Rose spends in the pokey depends on whether he files tax returns and pays the taxes. Up next, the criminal trial of his wife, Tessa.
August, 2005 -- KPMG Cohort Pleads Guilty to Tax Crimes
The dam is about to burst on KPMG, the international accounting firm caught selling bogus tax shelters and its tax-cheating collaborators. Domenick DeGiorgio, a former executive with HVB Group, a German bank, recently plead guilty to charges involving conspiracy to commit tax shelter fraud, tax evasion and other crimes stemming from his dealings with KPMG. Federal prosecutors hope to target additional criminal defendants who worked at KPMG, and the banks and law firms involved. The tax shelters have reportedly cost the government as much as $1.4 billion in tax revenue.
Mr. DeGiorgio, who is reportedly cooperating with prosecutors, may implicate unnamed individuals, which should affect how potential defendants will approach their legal strategies. Given the trial outcome of other high-file profile corporate defendants, it may not do a defendant any good to go to trial alone and challenge the testimony of former colleagues who are cooperating.
July, 2005 -- Tax Shelter Promoters Face Civil Racketeering Charges
A federal district court has permitted civil RICO (Racketeer Influenced and Corrupt Organizations Act) charges against the promoters and facilitators of the CARDS tax shelter to proceed to trial. Plaintiff Reece Jones, who claims that defendants engaged in an unlawful civil racketeering scheme in connection with the sale to him of the CARDS tax shelter, has defeated the defendants' attempt to dismiss the case.
This represents a potentially crippling blow to the promoters of bogus tax shelters and their web of bankers, attorneys and accountants, since a successful RICO case carries a treble damage recovery. Click here to review the Court's order.
June, 2005 -- Bannister Acquitted of Tax Charges
In a stunning IRS defeat, Joseph Banister, a notorious tax-protester, was acquitted on charges of conspiracy and helping to prepare three false tax returns for Al Thompson, a tax cheat found guilty in an earlier trial.
Although Bannister publicly champions his bizarre views regarding federal taxation, he refused to take the stand or engage in tax-protester rhetoric during his trial. Instead, his defense was that he pays his taxes and he was merely preparing tax returns on behalf of a client who chose to question federal tax laws. Thus, Banister's views (the so-called Section 861 argument, among others), which have been uniformed rejected by every court ruling on these theories, were not directly before the court.
In essence, Bannister claimed that in his capacity as a tax preparer, he merely assisted his client in filing tax returns questioning the validity of the tax laws. The tax law permits tax preparers to file so-called "tax protest" returns at the direction of their clients. Nevertheless, the acquittal of Banister will undoubtedly fuel the tax-protestor movement since one of their superstars managed to "beat the rap."
June, 2005 -- KPMG Confesses to Illegal Tax-Shelter Promotions
According to an article in the Wall St. Journal dated June 16, 2005, KPMG faced with possible criminal prosecution for its misdeeds, has publicly confessed to illegal activity involving fraudulent tax shelters, stating that it "takes full responsibility for the unlawful conduct by former KPMG partners" promoting bogus tax shelters. KPMG is one of the four major global accounting firms, with annual revenues of $4.4 billion.
KPMG's contrition is a far cry from its arrogance and false denials both in court and in testimony before the Senate. According to court documents filed to comply discovery, IRS claimed that KPMG, "falsely asserts that it has never developed, sold or promoted a tax shelter..." A Senate Report stated that, "although KPMG denies being a tax-shelter promoter, the evidence establishes that KPMG devoted substantial resources to, and obtained significant fees from ... potentially abusive and illegal tax shelters ... costing the U.S. Treasury billions."
The Senate estimated that KPMG earned revenues of between $130 and $180 million from four separate tax-shelter promotions. Now, with federal criminal charges looming, KPMG has suddenly become humble and cooperative, in an obvious effort to avoid becoming the next "Anderson", another cocky and arrogant international accounting firm that self-destructed under the weight of the Enron and Worldcom scandals.June, 2005 -- IRS Issues Tax Shelter Audit Guidelines
IRS has issued a 47-page set of comprehensive Audit Guidelines for investigating abusive tax shelters, including links to relevant IRS Notices. The guidelines will assist taxpayers and their independent advisors in determining whether a proposed transaction will be considered an abusive tax shelter.
June, 2005 -- Tax-Scam Artist Lynn Meredith Sentenced to a Decade in the Slammer
Lynne Meredith, the notorious tax-scam artist and author of the infamous anti-government tome "Vultures in Eagle Clothing," and who once bragged on the national television show "20/20" that she does not pay taxes, will spend ten years in the slammer after being convicted of conspiring to defraud the Internal Revenue Service and failing to file personal income taxes.
"Your honor, I'm not a conspirator. I'm a constitutionalist", Meredith, the head of an organization called "We The People", told US District Judge Dean Pregerson, who sentenced Meredith to a decade in federal prison, and her cohorts to terms ranging from 20 months to five years. Gayle Bybee, Meredith's chief lieutenant was sentenced to five years.
Meredith spent over a decade, beginning in 1991, holding seminars and promoting her three books on how to avoid paying taxes by placing personal assets into phony "pure trusts". Meredith would then sell pure trusts for up to $1,000 each. Assistant US Attys Alicia Villarreal and Brian Hershman contended Meredith's promotions were nothing but a vast scam that victimized thousands of people. For additional information see the Department of Justice press release regarding We the People.
Meredith's attorney, Joe Izen, who (according to Meredith) once claimed that when the jury acquits her, he will savor the victory and then retire, was evidently boasting outside the courthouse that the government wanted a 20-year sentence, but he got her off with only a decade behind bars! By the way, ten years is one of the longest sentences ever meted out to a criminal tax defendant.
April, 2005 -- Tax Scam Promoter Receives 6 Years in the Pokey
Al Thompson, a supporter of noted tax-scam artist Joseph Bannister, was called an "incorrigible" tax cheat by Judge William B. Shubb as he sentenced him to six years in prison for failing to pay $259,000 in taxes owed to the government. Calling the sentence "lenient", the Judge was clearly frustrated that the Justice Department did not charge Mr. Thompson with the more serious crime of tax evasion which would have allowed for a much longer prison sentence.
Thompson, the owner of Cencal Aviation Products located in Lake Shasta, California, bragged about not withholding taxes on wages paid to employees to the national media, including the New York Times newspaper, and dared the government to prosecute him. Evidently, he got his wish.
Note: Joseph Bannister, the architect of the tax scams unsuccessfully employed by Thompson, has been indicted on charges stemming from his dealings with Thompson and is awaiting trial in Lake Shasta.
April, 2005 --IRS Describes "Massive" Effort to Eliminate Tax Scams
On April 6, 2005, IRS held a press conference to celebrate the 100th civil injunction against tax scam promoters. The injunctions have led to tax recoveries in the hundreds of millions, according to Eileen O'Connor, Assistant U.S. Attorney General.
In its ongoing effort to crackdown on tax scams, IRS claims to have more than 1,000 tax-scam promoters under current investigation and thousands of participants are supposedly under examination. IRS is currently investigating more than 1,000 promoters that may be referred to the DOJ. Thousands of participants in promoters' tax schemes are being examined by the IRS, as well.
When IRS obtains a civil injunction, client lists are usually turned over under the court's order, thus leading to the identities of taxpayers using the scheme to avoid taxes. Everson noted that IRS has adopted a much tougher stance with taxpayers who cheat, stating that criminal prosecutions have increased, as well as audits of wealthy taxpayers.
March, 2005 -- Ashcroft Ally Indicted for Tax Evasion
Charles Polk Jr., 44, of St. Louis County, an attorney and longtime advisor to former Attorney General John Ashcroft, has been indicted on numerous charges, including money laundering, stealing from his clients and tax evasion. Polk, an Afro-American, defended Ashcroft against charges he was a racist, a charge that arose during Ashcroft's nomination for attorney general.
The tax evasion portion of the indictment claims that Polk failed to file tax returns from 1998 through 2002, although he earned more than $1.7 million during that time, thereby evading taxes of approximately $470,000.March, 2005 -- Jack Levin Makes a Case of Tax Simplication
Jack Levin, a leading tax attorney and lecturer, produced a simple, yet stunningly eloquent, Powerpoint presentation for the President's Commission on tax simplification, entitled "All You Ever Wanted to Know About U.S. Income Taxation of Business Enterprises."
Jack's presentation illustrates why our tax laws are so complex. This is a must read for those interested in how our tax system actually operates and why, under our current system, complexity is inevitable.
March, 2005 -- Telecom Mogul Indicted for Tax Evasion
Walter Anderson, a Washington telecommunications mogul has been indicted on twelve counts of tax evasion charges involving almost a half-billion dollars in personal income hidden through an labyrinth of offshore corporations. In probably the largest individual case of tax fraud, Anderson has been accused of evading about $170 million in federal taxes and $40 million in taxes to the District of Columbia.
Anderson was arrested at Dulles International Airport in Virginia on Saturday afternoon after a flight from Europe. If convicted of all charges, Mr. Anderson faces up to 80 years in prison, the department said.
To evade taxes on the sale of his company, Anderson allegedly formed an offshore corporation called Gold & Appel Transfer in the British Virgin Islands. He structured his dealings to retain complete authority and control over the companies. He then transferred his Gold & Appel shares to a Panamanian corporation in a continuing effort to hide his ownershiop. Anderson did not report the net earnings of Gold & Appel on his federal and District of Columbia tax returns as he was required to, prosecutors said.March, 2005 -- Using Domestic Asset Protection Trusts to Avoid Bankruptcy
On March 2, 2005, the New York Times published an article contending that domestic asset protection trusts (DAPT), available in Alaska, Delaware, Nevada, Rhode Island and Utah, can be used to exempt assets from bankruptcy. Under these statutes, property held in DAPT do not belong to the individual. State law governs whether an assets belongs to an individual and subject to the jurisdiction of the bankruptcy court.
A debtor in bankruptcy cannot create a spendthrift trust to protect himself from creditors -- a so-called "self-settled spendthrift trust." In contrast, DAPTs allow for self-settled spendthrift trusts; thus, a wealthy person can transfer property to an asset protection trust and usually two to four years later (depending on state law) can then file for bankruptcy without subjecting the trust's assets to creditor's claims.
Unless Congress amends the pending bankruptcy legislation, DAPTs will provide individuals with substantial assets with a way to shield those assets from creditors, even when the individual files for bankruptcy.February, 2005 -- Larkin Rose, Proponent of the "Section 861 Argument" -- Indicted for Tax Evasion
Notorious tax protester Larken Rose, (along with his wife, Tessa David Rose) of Hollywood, Pennsylvania was indicted on five counts of willfully failing to file federal income returns for tax years 1998 through 2002. According to the indictment, the Roses earned approximately $ 503,161 from their medical transcription business which they failed to report on their tax returns. If convicted, they face a maximum prison sentence of 5 years imprisonment, a fine of $ 125,000. Rose is known for his bogus "Section 861" argument which he falsely claims that only foreign source income (as defined by Rose, of course) is taxable under the Internal Revenue Code. Of course, no court has ever upheld such a ridiculous claim, but that has not stopped Rose from selling tapes hawking his snake oil.
The IRS crackdown on nationally-prominent tax protester leaders continues. Rose is just the latest in a list that includes, Irwin Schiff and Joe Bannister. Last year, Lynn Meredith, author of "Vultures in Eagle's Clothing" and the leaders of Anderson Ark were convicted of tax crimes. UPDATE: Rose was convicted on all counts - See the August, 2005 entry, above.February, 2005 -- IRS Crackdown on Executive Stock Option Tax Shelters
IRS is offering a settlement program to executives and corporations involved in the improper transfer of employee stock options. The scheme involves executives, in cahoots with their corporations, transferring valuable stock options to entities controlled by the executive's family to avoid paying income taxes on the exercise of the stock options.
Read about the settlement program in the Tax Prophet's Memo Crackdown on Executive Stock Option Tax SheltersNovember, 2004 -- Hooter's Founder Accused of Hiding "Assets" Offshore
Evidently, the founder of the Hooters restaurant chain, Lynn "L.D." Stewart, who made a fortune by uncovering the "assets" of his waitresses, failed to apply the same business strategy when it came to his taxes!
Stewart has been indicted for tax evasion for his failure to pay millions in taxes. Stewart funneled money through off-shore trusts and companies through an elaborate scheme promoted by Michael Maricle, a certified public accountant who pitched a trust system run by Aegis, a Chicago tax-scam company.
Stewart failed to pay $1.7-million in income taxes for 1997 and $2.3-million for 1998, the indictment states. He earned $12.1-million in taxable income in those two years, but he declared $910,044, according to court documents. According to his lawyer, Stuart will claim that he simply followed the advice of an accountant who set up a web of offshore trust accounts that concealed his income from the Internal Revenue Service.
October, 2004 -- IRS and Virgin Islands Crackdown on Economic Development Program
The Internal Revenue Service and Virgin Islands Bureau of Internal Revenue (VI BIR) tax official announced today the establishment of a new partnership to work together on common tax enforcement issues, including alleged income tax benefits under the Virgin Islands Economic Development Program (EDP) - See July, 2004 Hot Topics and August, 2004 Hot Topics). The IRS and the VI BIR will coordinate examination activities of those claiming EDP benefits.
The Virgin Islands joins 48 states, the District of Columbia and New York City on the list of tax agencies that have signed partnership agreements with the IRS, including: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York State, New York City, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia and Wisconsin. Notably, Nevada and Wyoming are not on the list.
In 2004, IRS has shared leads on approximately 35,000 taxpayers engaged in abusive tax avoidance with these states and cities.
October, 2004 -- Taxpayers Indicted for Stashing Stock Options Offshore
A couple in San Martin, California were recently indicted by a grand jury for income tax evasion. The investigation began as a result of an IRS audit where indications arose that the couple had under-reported their income. The couple allegedly established offshore corporations for the purpose of concealing income derived from the sale of stock options and transferred the stock options offshore for the same purpose. Supposedly, income derived from the sale of the stock options was concealed in offshore bank accounts in the Island of Nevis. The indictment alleges that the couple understated their 1997 taxable income by about $2,000,054 and understated their tax due and owing for that year by about $782,624.
Further, as part of their tax evasion scheme, the couple allegedly hired a third party to falsely pose as a president of a separate company, which was also controlled by the couple, in order to claim a debt purportedly owed to that company. Under federal law, violations of certain counts under the indictment include maximum statutory penalties of five years and a fine of $250,000.
October, 2004 -- "Mr. Valuation Discount" Headed for the Slammer
Owen G. Fiore, a noted California tax attorney, famous for pioneering the concept of the valuation discount for family limited partnerships, recently pled guilty to federal income tax evasion. According to the indictment, Fiore "forgot" to declare large sums of taxable income over several years.
Under a plea agreement, the 70 year old attorney admitted to understating his taxable income for tax year 1999 by $522,594 and his income tax by $214,420. Fiore admitted that he prepared his own 1999 federal income-tax return in which he understated the business receipts from his law practice by $473,978. Mr. Fiore will pay the government an additional $301,623 in restitution, on top of $325,000 he previously paid. He could also receive a maximum prison sentence of 5 years.
August, 2004 -- Bogus Tax Shelter Created by Nobel Economists Fails
Each may have won a Nobel Prize in economics, but when Myron E. Scholes and Robert C. Merton tried to devise a tax shelter or Long-Term Capital Management, LP (a limited partnership) that generated $106 million in losses, translating to about $40 million in saved taxes, they got their hats handed to them, according to a recent U.S. District Court decision rendered by Judge Janet Bond Arterton. The court ruled that not only were all taxes due, but that a fine of approximately 40% was justified for the improper valuations used in the scheme.
The tax shelter was enormously complex, but a central tenet was that the transaction earned a profit, apart from the tax benefits. The government successfully argued that not only was the profit paltry compared to the tax benefits claimed, the payment of a bonus to the Nobel Prize winners essentially wiped out the paper profit.
The judge decided the transaction lacked economic substance and would not have been created, except as a tax dodge, and criticized Mark Kuller, the big-time tax attorney (and founding member of McKee Nelson, a tax shelter advice firm, according to the New York Times) who wrote the legal opinion justifying the tax shelter, noting that his opinion lacked credibility as it was unsupported by emails and documents pertaining to the opinion.
NOTE: This is typical of many tax shelters: The legal opinion is often divorced from the actual facts of the transaction.
The lesson: A phony tax shelter does not gain economic substance just because two Nobel prize winning economists create it.
August, 2004 -- Ninth Circuit Bans Irwin Schiff from Selling His Book, The Federal Mafia
Notorious tax protester, Irwin Schiff's, a twice convicted tax felon, and his associates are banned from selling his book, "The Federal Mafia," according to the Ninth Circuit Court of Appeals, because the book advocates illegal activity, namely, tax fraud and evasion. The court decided there was no First Amendment protection for Schiff's fraudulent tax claims and that the book advertised Schiff's products and services promoting criminal tax violations.
The court found that "given Schiff's extensive history of tax avoidance and the fact that the defendants operate a bookstore devoted to introducing others to his tax avoidance schemes, there is a strong likelihood that the defendants would violate Section 6700 in the future." The court also noted that, "[Schiff's] extensive history of litigation with the IRS leaves little doubt, not only that his theories are wrong, but that he knows they are wrong."
Mr Schiff, indicted in March, 2004 for tax evasion, may have trouble financing his defense, now that he has been cut off from his prime source of revenue, sales of the Federal Mafia.
July, 2004 -- Global Prosperity Scam Artist Pleads Guilty to Felony Tax Charges
Daniel Andersen, a co-founder of Global Prosperity, one of the internet's most notorious tax-scam organizations, pled guilty to a felony tax charge of conspiracy to defraud the United States. Global Prosperity conned its victims of more than $50 million for sales of a "home-study" series of "wealth-building" audiotapes and compact discs, selling for $1,250 each; and tickets to domestic and offshore seminars, which sold at prices ranging from $6,250 to $37,000 each. These worthless products involved "wealth-building" strategies, including such tax cheating methods as: (i) placing assets in purported foreign or common law trusts without giving up control of the assets; and (ii) attempting to remove oneself from the jurisdiction of the United States.
Not only did Andersen profit from his victims, he cheated the government as well by concealing Global Prosperity through the use of bogus trusts, nominee entities and related bank accounts that he owned and controlled, including the use of offshore bank accounts. He maintained signature authority over the offshore bank accounts and transferred funds back into the United States through wire transfers and debit cards. Andersen admitted that his actions caused a tax loss of between $2,500,000 and $7,000,000.
Obviously, these wealth-building strategies were designed to make the scam artists operating Global Prosperity rich while sending their clients to the poorhouse!
July, 2004 -- "Son of Boss" Settlement Initiative Produces Strong Results
More than 1,500 investors in the "Son of Boss" tax shelter elected to participate in the IRS's settlement offer by the June 21st deadline. IRS will begin enforcement actions against those taxpayers who have not taken the offer to settle, according to IRS Commissioner Mark W. Everson.
The settlement agreement requires taxpayers to forego all tax benefits from the Son of Boss tax shelter and pay all applicable penalties (a maximum of 20%) plus interest. IRS will permit a long-term capital loss deduction for fees and costs paid by taxpayers to the promoters and professionals involved with the tax shelter. Those taxpayers subject to enforcement action will not be allowed to deduct promoter and professional fees, and will face penalties of up to 40%.
IRS estimates that approximately 85% of the known Son of Boss participants elected to settle. However, there were an additional 300 settlement participants previously unknown to IRS. The general range of tax benefits claimed was between $10 million and $50 million, although some of the losses claimed exceeded $500 million.
June, 2004 -- IRS Gunning for Virgin Island Tax Scam Promoters
Here's an "exotic" shelter, literally (think grass shack). Move to the U.S. Virgin Islands (VI), start a business there and the government will reduce your taxes by 90%. What a deal! However, you really must move to the VI and start a business that generates VI-source income.
Leave it to the tax-scam artists to figure out a way for you to pretend to move to the VI and pretend to receive income from VI sources in order to claim the 90% credit on federal taxes. Promoters have been touting a scheme whereby U.S. resident taxpayers route their salary or business income through a VI entity, such as a limited partnership, and then take steps to "fake" VI residency. The result: taxpayers continue to reside in the continental U.S. for most of the year and run their businesses just as before, but claim a 90% rebate on taxes paid!
IRS has come out swinging against this scam. See Notice 2004-45. Just Ask Gary J. Payne, an insurance executive who funneled his income through a VI entity, and who just pled guilty to just such a scheme. Expect more criminal indictments in the near future.
June, 2004 - Sanctions Imposed Against Tax Protestor's Attorney for Making A Frivolous "Brushaber" Argument
Deliberately distorting the Supreme Court's holding in "Brushaber" seems to be a passionate pastime for the tax-protester crowd. The "Brushaber" argument, as expounded on countless tax-scam websites, claims that the federal income tax is not applicable to wages and salaries because it is an "excise" tax and excise taxes do not apply to wages and salaries. This is clearly nonsense; see the Pollock case cited below.
Clearly, the courts have had enough. The Sixth Circuit Court of Appeals not only sanctioned the taxpayer, but also his appellate attorney for making a frivolous argument, noting specifically the constitutionality of the 16th amendment granting Congress the power to tax incomes "from whatever source derived," noting:
In Brushaber, the Court found the 1913 income tax law to be constitutional. The Court also noted that in Pollock [v. Farmers' Loan and Trust Co., 158 U.S. 601 (1895), a case that pre-dated the establishment of the federal income tax in 1913], it had previously found the taxing of income from professions, trades, employments or vocations to be constitutional in the form of an excise tax. In light of the sixteenth amendment, however, all taxation of income, "from whatever source derived," was found to be constitutional in Brushaber.
June, 2004 - California Targets Tax Shelter Insurance
The tax shelter industry sells investments to wealthy individuals and corporations which supposedly reduce their tax bills. IRS claims these shelters are largely bogus and has begun an aggressive campaign to audit those involved. Now, apparently, the tax shelter industry is offering "tax audit" insurance to its investors (covering any fines or penalties) and this has California lawmakers seeing red. Evidently the international accounting firm and major tax-shelter promoter, KPMG, instructs their salespeople to use the insurance policies to hook potential participants.
California is considering outlawing this insurance, claiming the primary purpose is to help wealthy taxpayers avoid paying their fair share of taxes. The Franchise Tax Board has issued subpoenas to both AIG and Hartford Financial Services Group, for supposedly providing policies for questionable tax arrangements.
At a time of enormous deficits, California's crackdown is proving lucrative: The state's recently enacted amnesty program offered taxpayers an opportunity to "come clean" regarding irregular tax avoidance strategies and avoid new and stronger penalties. California estimated about $90 million in revenue from the program; instead, $1.3 billion was collected.
May, 2004 - Tax Protester Guru Lynne Meredith Found Guilty on Multiple Counts
Lynne Meredith, the strident, in-your-face, author of "Vultures in Eagles Clothing" (an incoherent diatribe against the U.S. government in general and the IRS in particular) was found guilty on multiple felony counts stemming from the sale of bogus pure trusts and other illegal tax dodging activities. Meredith, whose rantings against the government netted her millions from greedy, gullible, unimformed and naive taxpayers who purchased her books or/and followed her advice, was immediately taken into custody upon the jury's finding of guilty. Her immediate incarceration was the result of Meredith's conviction on passport fraud, in addition to tax crimes, making her a "flight risk." Her six cohorts were also found guity of various tax crimes. See the government's press release.
Poor Meredith, she wakes up one day expecting to be acquitted and winds up in a jail cell where she'll probably stay for at least 10 years. See Meredith's confident prediction of victory, based on her so-called "First Amendment" defense. There is, however, a major problem with her defense: The first amendment does not apply when a person is advocating and participating in a criminal act. To paraphase a famous song, "She fought the law and the law won." Meredith will no doubt blame everyone and everything -- except herself -- for her self-imposed predicament.
Meredith was represented by Joe Izen, an attorney infamous in legal circles for representing tax protesters and trust scam artists. Izen has been blasted by the U.S. Tax Court for his antics. See Shirley L. Johnson vs. Commissioner, 116 T.C. No. 10 ("Izen has a long history of involvement with sham trusts, both as counsel of record and as counsel rendering an opinion on which taxpayers unfortunately relied.").
The Tax Prophet testified as an expert witness on behalf of the U.S. government in this case and explained that Meredith's pure trusts were nothing but worthless shams and that taxpayers could not escape the payment of tax by using her trusts.
The bottom line: If you earn income, you must file a tax return and pay taxes, there are no exceptions, period. Use of a trust, even if legitimate, does not prevent or excuse the filing and payment of taxes. When a bogus or sham trust is used, the trust is ignored and the taxpayer must report the income on his or her individual Form 1040 and must pay taxes on that income - again, there are no exceptions.
March, 2004 - IRS Issues Stern Warning Regarding the Taxation of Employee Stock Options
IRS Issued Notice 2004-28 (March 26, 2004), warning Taxpayers of severe penalties for frivolous tax return positions.
IRS has aggressively attacked promoters who are advising taxpayers to misreport their income in a manner contrary to settled law with respect to the income generated from the exercise of employee stock options. IRS lists several well-publicized promoter theories and warns taxpayers they could face penalties, including civil fraud and possibly criminal fraud in connection with their tax returns, unless those returns are amended immediately.
The Notice appears to target the Isaacson Law Firm and others who aggressively and publicly promote some of the theories described in Notice 2004-28. IRS calls these theories "frivolous."
March, 2004 - Irwin Schiff Indicted for Tax Evasion (again)!
Notorious tax-scam promoter Irwin Shiff has been indicted once again for tax evasion. This time, his scam involved the so-called "zero-income" tax return. The indictment alleges that Schiff instructed almost 5,000 taxpayers to commit fraud by reporting their incomes as zero. Schiff is also charged with evading taxes on more than $3 million in income from his book publishing business. Click here to read the indictment.March, 2004 - Justice Deparment Accuses Major Law Firm of Fraud Regarding Its Tax Shelter Opinions
The Justice Department, accusing the law firm of Jenkens & Gilchrist of perpetrating a fraud in connection with its tax options concerning abusive trust arrangements, is attempting to circumvent the attorney-client confidentiality privilege normally afforded clients with respect to legal advice received from their attorneys. The Justice Department is proceeding under the so-called crime-fraud exception (normally associated with attorneys representing organized crime and drug dealers), to obtain the names of clients who participated in abusive tax shelters designed by the firms attorneys.
Evidently, Jenkens & Gilchrist received $900,000 per tax opinion and issued more than 600 of these cookie-cutter opinions to clients who participated in the schemes, costing the government more than $1 billion in taxes. The firm has refused to comply with any of the 25 summonses issued.
This Justice Departments move against one of the largest law firms in the U.S. signals a get-tough approach toward tax scam promoters and professional advisors.March, 2004 - IRS Unveils Its Dirty Dozen Tax Scams
IRS has listed the top dozen current tax scams and once again, abusive trusts (the "pure trust" scheme widely promoted on the web) top the list. The "corporate sole" rip-off made the list for the first time. Check out this year's list of the Dirty Dozen.February, 2004 - Off-shore Tax Haven Guru Jerome Schneider Pleads Guilty to Tax Crime.
Jerome Schneider of Vancouver, British Columbia, who smiling face adorned airline magazine advertisements (replete with fancy jets and cars), plead guilty to a single count of conspiracy to defraud the government. It was estimated that Schneider helped wealthy taxpayers hide approximately $100 million in off-shore accounts. Schneider faces a prison term of 24 months. As part of the plea bargain, the government expects Schneider to divulge the names of his tax-cheating clients.February, 2004 - Schiff Follower Guilty of Tax Evasion
Steven Swan, a follower of the zero-income tax philosophy of notorious tax protester Irwin Schiff, was found guilty of filing false tax returns and interfering with the administration of income tax laws. Swan represented himself and tried to blame Schiff for his beliefs. Obviously, the jury didn't buy it.
February, 2004 - IRS Fact Sheet Warns Against Tax Preparer Fraud
IRS has published a fact sheet describing a series of recent criminal tax convictions of tax preparers. IRS warns taxpayers to be careful when selecting a tax preparer, noting that tax preparers who want a percentage of the amount saved could be suspect. The fact sheet also contains the number of criminal prosecutions and convictions for the past 3 years. In general, the conviction rate is over 90% and the average jail time is about 18 months.February, 2004 - Irwin Schiff Claims He Suffers From Bipolar and Delusional Personality Disorders
In a startling admission that should send his followers into a tizzy , Irwin Schiff, in an effort to avoid civil tax fraud penalties, filed court documents stating that he "has exhibited symptoms of a chronic and severe delusional disorder." Although his lack of rational thinking has been obvious to anyone with a tax background who heard his nonsensical ranting. Nonetheless, Schiff convinced hundreds, if not thousands, of taxpayers to file phony tax returns, claiming they owed no tax.
Schiff's personal psychologist stated in court documents that he suffers from Bipolar Disorder and concurrent Delusional Personality Disorder. His psychologist concluded, "In short, Mr. Schiff's behavior is not rational. It is the product of a Delusional Personality Disorder that is not amenable to treatment and is unlikely to remit." Schiff evidently dumped his girl friend Cindy Neun after she stated that his condition was merely a ruse to avoid paying civil tax fraud penalties owned to the government.
Of course, we hope that Schiff and all those suffering from mental illness receive compassion and proper treatment, and do not make light of this serious and tragic situation; however, Mr. Schiff has spent decades convincing naive and gullible taxpayers to violate tax laws. Now that he has admitted his mental problems, perhaps his followers will finally realize their Messiah is delusional. See Schiff's filing in United States of America vs. Irwin A. Schiff, Civil No CV-S-01-0895-PMP (LRL).
January, 2004 - Texas Tax Scammer Found Guilty
You have to pay taxes, even in
! Richard M. Simkanin, a Texas businessman and owner of Arrow Custom Plastics of Bedford, Texas, failed to withhold taxes from his workers paychecks since year 2000 forty-nine employees were involved and $175,000 in taxes. Simkanin was also charged with filing fraudulent returns and failing to file personal returns. A jury of his peers did not fall for his BS about the illegality of the income tax system and other tax-protestor gibberish and found him guilty of federal charges on January 7, 2004. Now, Mr. Tax Protestor Hot Shot and darling of the so-called "Tax Honesty" movement faces up to 139 years in prison for his offenses and is currently set for sentencing on April 30, 2004;See October, 2003 below for details about Mr. Simkanin. Texas
Mr. Simkanin was denied bail after authorities were informed that Simkanin had been talking about killing federal judges. Judge McBryde likened defendant, and others who share his views, to being cult-like. Simkanin no longer considers himself a citizen of theDecember, 2003 - GAO Critical of IRS Efforts to Combat Tax Scams
but admits allegiance only to the United States . Echoing the trust scam devotees, he holds that neither the Constitution of the Republicof Texas , nor any other specific law maintains that the majority of United States workers are legally obligated to pay taxes. Simkanin will now have many years in the pokey to contemplate his stupidity. U. S.
The General Accounting Office issued an unfavorable report called Challenges Remain in Combating Abusive Tax Schemes regarding IRS efforts to stop the proliferation of tax cheating. The Internet has provided scam artists the opportunity to market a myriad of tax scams, including foreign bank accounts, formation of foreign businesses to siphon-off U.S. based profits as well as garden-variety "pure trust" schemes and their progeny.
December, 2003 - Anderson Ark Off-shore Scam Promoters Arraigned
Keith Anderson and his bunch were tagged with additional criminal charges stemming from their receipt of approximately $21,000,000 from AAA members which they represented was to be invested at a rate of return of 4% every six weeks. It is alleged that the so-called Loan 4" program was a sham. For detail, read the IRS press release.
October, 2003 - IRS Takes After the Corporate Sole Tax Scam
The Justice Department filed a lawsuit involving a new wrinkle to the decades old "pure trust" scam, an entity called a "corporation sole." The corporation sole, according to the claims of its promoters, does not have to pay taxes on its earnings, as long as the corporation operated on "spiritual principles." The defendant, Judy Harkins, of Salem, Oregon, worked for American Tax Consultants, a company that formed bogus corporation sole entities to assist customers in evading taxes, according to the Justice Department's complaint. The Justice Deparment is seeking a court order halting the sale and promotion of the tax scam.
October, 2003 - Big-Time Section 861 Scam Artist Pleads Guilty
"Tax honesty" advocate and business owner Richard M. Simkanin, admitted he knew that he had to pay taxes, but tried to cheat the taxman anyway, by whining that the government never told him the tax system was not voluntary. Simkanin, an advocate of the so-called Section 861 tax scam, which, through a tortuous misreading of the statute, falsely concludes that only foreigners subject to the Internal Revenue Code, pled guilty to one felony charge, according to an article written by David Cay Johnson of the New York Times and published October 1st. The defendant failed to withhold taxes on wages paid to employees. With this guilty plead, IRS has been given the green light to proceed against Simkanin's employees who participated in the scam for delinquent taxes.
Thus, one of tax honesty's most vocal supporters cowered before the federal court system and pled guilty to save himself from an almost certain conviction. Of course, rather than admit to in public that the Section 861 argument is nothing but a scam, Bob Schultz, a spokesperson for the movement claimed the defendant was railroaded by a prejudiced judge, according to Johnson's article.
The lesson: In the first criminal indictment involving the Section 861 scam, the government secured a guilty plea from one of the movement's most outspoken advocates. Those still drinking from this fountain of hogwash are about to drown in their stupidity!
September, 2003 - IRS and States Team Up Against Tax Scam Artists
IRS and 40 states announced at a joint press conference in Washington, D.C. that they have entered into a partnership to crackdown on tax schemes and their promoters. IRS has been after tax scams on the web and elsewhere for several years, but recently solicited the assistance and resources of state tax authorities in the effort. Apparently, IRS has enjoyed better success at limiting corporate tax shelters than chasing down small-time scam artists targeting individuals.
Ironically, in a bold, if foolhardy in-your-face gesture, a band of tax protesters and scam artists demonstrated outside the government press conference, handing out materials claiming tax laws do not apply to them. These claims have been rejected by every court that has heard them and hundreds of such protesters have found themselves broke, in jail for long prison sentences, or both. Nevertheless, these people seem undeterred by reality, or they are driven by the opportunity to make a fast buck scamming otherwise honest taxpayers with their snake oil.
Although IRS shares information with the states once an audit has been completed, under this new partnership, IRS will share leads and assist in state-run investigations. The theory is that state investigators will move more quickly than the risk-adverse bureaucrats at IRS. Also, states may have financial resources available to pursue these cases, thus shifting the cost burden away from the cash-strapped IRS.
One ray of hope for scam artists: Move to Nevada. Thus far, Nevada, which does not have an income tax and brags about its non-cooperation with IRS, has not signed on as a partner in the tax fraud crackdown.
September, 2003 - Tax Prophet Credited for Devising Plan to Crackdown on Scam Artists
A conservative publication sympathetic to Bob Schultz, the leader of the notorious " We The People" tax-scam outfit, claims the Tax Prophet convinced IRS to use a "strike force" to go after tax criminals. While undoubtedly untrue (IRS Criminal Investigations does not need my help), but ego boosting nonetheless, John Dougherty of WorldNetDaily.com in his September 12, 2003 article, writes that a dialogue between the Tax Prophet and Senator Max Baccus during testimony before the Senate Finance Committee shows that yours truly suggested that such a strike force would be effective in nailing these tax-scam artists.
While I did testify about using a strike force, it was in connection with shutting down websites that were selling bogus tax schemes on the internet. The concept was to follow techniques used by other federal agencies to shut down websites promoting phony diet pills or bogus stock schemes. The remedies were civil in nature -- an injunction and court order closing bogus tax cites. Somehow, my comments were linked to the recent raid on Irwin Schiff, the godfather of tax scams.
The article's premise, that innocent people raising legitimate questions about IRS's authority to make them pay taxes are being harassed by a strike force -- is laughable. These scam artists have been using stale and frivolous arguments that have been rejected by every court that has heard them (more than 500 cases); no one in Congress is the least bit sympathetic to these charlatans.
August, 2003 Tax Protester Acquitted of Tax Evasion
A jury acquitted Vernice B. Kuglin, a Federal Express Pilot who failed to pay taxes on approximately $920,000 of income received over a 6-year period because she claimed she thought compliance with income tax laws was voluntary. The defendant stated she inquired about whether the income tax system was voluntary, but IRS refused to answered her, thereby misleading her into believing that she was not required to pay tax. Note: A criminal conviction for tax evasion requires an intentional violation of the law. Evidently, the jury believed her defense that she honestly thought she was not required to pay taxes, regardless of whether such a belief is reasonable or true.
A defensive-sounding Justice Department official stated that although there are hundreds of criminal tax convictions, every so often, there is an acquittal and promised that IRS would pursue the defendant in civil court for all taxes due, plus penalties and interest. For Ms. Kuglin, her victory was hollow after expending attorneys fees for her defense, she will owe an amount equal to all taxes, penalties and interest on the income she thought was tax-free.
Although tax protesters hailed the victory as validating their claims, the case appears to be an aberration, according to statistics. The conviction rate in these cases is well over 99%. Nevertheless, IRS may have to change the way it responds to tax protester arguments, perhaps inserting a provision in the instructions to Form 1040 stating that payment of income tax is not voluntary and Section 1 of the Internal Revenue Code and regulations thereto clearly state that tax liability is imposed on taxpayers with income above a minimum threshold.
August 2003 - California's FTB Moves Against Tax Scams
Californias Franchise Tax Board is jumping into the crooked tax shelter game, having identified 150 suspected tax cheats for audit. FTBs Steve Westly stated at a news conference, California has zero tolerance for people who cheat the system through illegal tax shelters. I will do everything in my power to recover taxes legally owed but not paid... Abusive tax shelters victimize honest citizens who pay their fair share of taxes, while the tax cheats profit, costing California as estimated $600 million a year in lost revenues.
FTB will identify bogus schemes by encouraging informants and monitoring public sales pitches for tax shelters and bogus tax schemes, including transfers to off-shore bank accounts and corporations moving to Nevada in an attempt to thwart California taxes.
As individual states realize the potential revenue gain by shutting down this illegal activity, expect state, as well as federal, prosecutions of tax scam artists selling schemes on the web and through the media.
August 2003 - IRS Fails to Follow Up on Abusive Tax Shelter Leads
Although IRS identified 2,000 businesses actively engaged in tax cheating through the failure to withhold payroll taxes based on the phony Sec. 861 argument, it followed up on approximately 25% of those leads, according to a scathing report by the Treasurys inspector general for tax administration. The Sec. 861 argument falsely claims that only foreign taxpayers are subject to income taxes, a position uniformly rejected by every court that has heard this argument. Of those, about 12% were entered into IRS databases and of those just 35 cases were pursued for audit, just 2% of the cases identified. IRS lost files and failed to complete the necessary paperwork to start the audits, according to the inspector general.
In contrast, the Justice Departments civil division obtained 8 injunctions against those promoting the bogus Sec. 861 scheme. Thus far, only Richard M. Simkanin of Texas has been criminally indicted for his failure to withhold and pay over payroll taxes, based on the Sec.861 argument.
IRS promises to actively pursue those businesses who fail to collect and pay payroll taxes under Sec. 861.
June 2003 - Law Firm Sued for Aggressive Asset Protection
The Eighth Circuit Court of Appeals held that a New Jersey law firm engaging in aggressive asset protection to assist its client in the fraudulent transfer assets to evade a judgment creditor could be sued for creditor fraud and civil conspiracy. Asset protection enthusiasts be forewarned: If you overtly interfere with the rights of creditors in ways not permitted by law, you could be held liable for the damages owed by your client.
Note: Most asset protection schemes provide no real legal protection since courts routinely ignore them as lacking substance, however, such schemes were sometimes useful in bluffing unsophisticated debtors into believing the debtor had no assets.
Now, those assisting clients in violating the law can be sued along with the debtor. Thus, the dubious argument that although an asset protection scheme may not survive court scrutiny, it nevertheless has value because it makes it harder for an unsophisticated creditor to collect, has been hammered into obsolescence because those helping to hide assets now be sued for damages, along with the debtor.
May, 2003 - The Virgin Islands Tax Shelter Ploy
The U.S. Treasury Department received a complaint from a concerned tax practitioner regarding a scam where U.S. taxpayers obtain residency in the Virgin Islands through a special investor status under its Economic Development Program. Evidently, this special status is being claimed by hedge-fund operators to avoid U.S. taxes on their earnings, while retaining their U.S. citizenship. Expect IRS to crackdown on this dubious claim of legitimate residency.
May, 2003 - Tax Scam Artists Target Military Personnel
The latest tax scam ploy involves crooks who call military personnel and tell them they are entitled to a refund and requests a credit card number. The scammer provides an actual IRS 800 number, then makes unauthorized purchases with the credit card. Another scam involves sending financial information to a fake IRS website. The information is used to steal the person's identity.
May, 2003: Search Warrant Issued on Larkin Rose's Home
Larken Rose, the self-proclaimed undisputed expert and champion of the bogus IRC Sec 861 "gross income" argument, was the recipient of an IRS search warrant served on his home on May 6th. Rose wasted no time incriminating himself with an email to his subscribers: "Ive been telling them for five years that I receive significant income, but that I dont file and dont pay, and explaining WHY that is the case. John Ashcroft has a signed affidavit from me saying the same things. The IRS also has 1099s for all the income we receive from our transcription business, and correspondence with the IRS shows that they are well aware of our income, which we have never tried to hide."
April 2003, Steven Swan Still Throwing Rocks at Irwin Schiff
Steven Swan a criminal tax defendant in his own right, is now forming a new discussion group attacking his nemesis, Irwin Schiff www.SchiffIsWrong.info. Earth to Swan: You should should be concentrating on your upcoming criminal tax evasion trial.
March 2003: IRS Warns Taxpayers Against Participating in Offshore Deferred Compensation Scams
The IRS and the Treasury Department have warned taxpayers against participating in certain offshore deferred compensation arrangements involving domestic and foreign employee leasing companies, in which a taxpayer "resigns" from the current employer and signs an employment contract with an offshore leasing company. The offshore company indirectly leases the individual's services back to the original employer, usually using one or more intermediaries. The individual performs the same services before and after entering into the leasing arrangement. The scam is supposed to avoid income and payroll taxes.
February, 2003 - Irwin Schiff, the "Godfather" of the Tax Protester Movement, is Raided.
Twenty-five government agents, armed with a federal search warrant, raided the Las Vegas office of Erwin Schiff, the notorious tax protestor. Schiff, who served prison terms twice before for violating federal tax laws, has been advocating a new scheme called the "Zero Income Tax" filing. Agents seized records relating to Schiff's finances and customer lists. Schiff immediately launched into his well-known antics, comparing the federal agents to Nazis who were conducting an illegal raid.
February, 2003 - Busted Tax Shelters Wealthy Sue Accountants for Bad Advice
IRS is cracking down on abusive tax shelters, and thats bad news for hundreds, if not thousands, of extremely wealthy taxpayers who stand to lose millions in back taxes, interest and possible penalties. These tax shelters, a lucrative service provided by two prominent accounting firms, are under IRS audit and those who paid millions to participate in the shelters are now suing their professionals for bad advice.The simmering abusive tax shelter problem boiled over last week when Sprint disclosed that its chief executive, William T. Esrey and the companys president, Ronald T. LeMay, could owe more than $100 million in back taxes because of their participation in an Ernst and Young tax shelter.
Evidently, Ernst and Young sold the tax shelter for $5.7 million on the premise that Esrey and LeMay could exercise their Sprit stock options at a substantial profit, yet avoid paying taxes for 30 years. The tax shelter used a questionable basis shifting technique that IRS subsequently identified as abusive. First, a series of hedging transactions were used to convert ordinary income to capital gains. Next, the scheme raised the basis of the assets so no capital gains would be paid when the assets were sold.
Similarly situated taxpayers have begun suing their accountants and attorneys for negligent advice regarding the promotion of these tax shelters.
February, 2003 - IRS Releases 2003 "Dirty Dozen" Tax Tricks
IRS has just listed the top 12 tax tricks played on U.S. taxpayers. These include offshore accounts, slavery reparations, no witholding of wages, and various "de-taxing" schemes.
February,2003: Switzerland No Longer A Haven for Tax Cheats
Reversing decades of notoriety as the worlds leading tax haven for tax cheats, the U.S. and Switzerland reached a mutual agreement to exchange tax information concerning tax fraud. The countries agreed to exchange information on both civil and criminal matters where there is a reasonable suspicion of tax fraud.Any of the following could be considered illustrative of the categories of reasonable suspicion documentation; information from a taxpayer; credible informant disclosures; and circumstantial evidence. The agreement also lists hypothetical examples considered fraudulent behavior including deceptive bookkeeping; cash only businesses; international business affiliations; bribery payments; depositing income from fraudulent tax returns or selling schemes in a requested country; credit card use designed to avoid income tax. U.S. tax evaders with money stashed in secret Swiss bank accounts are no longer protected from IRS scrutiny.
February, 2003, IRS Updates its publication, "The Truth About Frivolous Tax Arguments."
This IRS publication debunks many of the tax-protester arguments being peddled on the Internet. For the fans and followers of Irwin Schiff and his "Zero-Income" snake oil remedies, this publication should be required reading. It might save you from financial ruin, a trip to jail or both. The same goes for the "foreign-source income" crowd and the "sovereign citizen" clan. Simply put, the "pure" trust and tax protester arguments populating the web have absolutely no merit. These arguments resurrect failed schemes from the past. They are peddled by unscrupulous scam artists who are in the business of ripping-off naive and gullible taxpayers.
February, 2003, Bush Budget Increases Funds to Pursue Tax Evaders
President Bushs budget will increase audits of taxpayers by 33% or more, focusing on taxpayers suspected of hiding income from businesses, partnerships, investments and offshore accounts. This effort could bring billions of additional revenue to the Treasury. However, financing for this proposal may be inadequate. IRS is scheduled to receive a 5.25% increase.According to the formula recommended by IRS commissioner, Charles O. Rossotti, the agency would need an increase of more than 7% to start adequately addressing the problem of tax fraud schemes. Mr. Rossotti reports that IRS currently can only afford to pursue about 20% of individual tax evaders; leaving the vast majority untouched and able to get away without paying their fair share.
January, 2003: IRS Declares Partial Amnesty for Offshore Tax Evaders!
If youre one of the thousands of taxpayers who used an offshore account to hide income and now are worried about landing in the pokey for tax evasion, good news: IRS just announced an amnesty program (called Offshore Voluntary Compliance Initiative). You have until April 15, 2003 to come clean and declare your hidden booty. Youll have to pay taxes, interest and, possibly, negligence penalties, but youll be spared criminal charges and civil fraud penalties. Not a great deal, but better than spending years at Club Fed. Note: Tax scam promoters need not apply there is no amnesty for you.
For news items prior to January 1, 2003, see the Archives.
Tax Prophet's Hot TopicsMay, 2003 - Tax Amnesty for Offshore Accounts: The Program and Results March, 2003: Busted Tax Shelters Wealthy Sue Accountants for Bad Advice October, 2002 - IRS Switches Auditing Gears Goes After Wealthy Tax Cheats July, 2002 - Is IRS Losing the Battle Against Tax Cheats July, 1999 - High Stakes Audit Roulette- Corporate Tax Scams - part 2 June, 1999 -High Stakes Audit Roulette- Corporate Tax Scams - part 1 May 1998 -- Trust Scams - An Update
September 97 -- Anatomy of a Trust Scam [These folks were recently convicted - see the new addition above].
April 1996 --Using Trusts to Avoid Paying Taxes - Will This Work?
Tax Prophet's FAQ'sApril, 2002 - Reward for Proving a Tax Protestor is Wrong July 20, 1997 - IRS Indicts Two Men for Phony Trusts
April 20, 1997 - Taxpayers Beware: Trust Scams Update
May 26, 1996 - Fraudulent Trust Arrangements do not Work.
IRS DocumentsNotice 97-24- In 1997, the IRS issued a Notice involving sham trusts and its nationwide crackdown on the promoters of these trusts. The Notice is reproduced in full. Note: Some trust scammers are attempting to distinguish their bogus trusts from the abusive trust arrangements described in Notice 97-24, by calling their scams "Legitimate Pure Trusts." Of course, calling a trust "legitimate" does not make it so and these trusts clearly fall within the illegal trusts described in Notice 97-24.
Illegal Tax Protester Groups: A web version of IRS's printed pamphlet discussing tax protesters and abusive trust arrangements.
Tax Prophet's Articles on The Tax Protester MovementThe Tax Protester Movement has fared no better in the courts. Check out the Tax Prophet's Hot Topics' articles: The Tax Protester Movement -- Proof That P. T. Barnum Was Right. and The Tax Protester Movement - Still Batting Zero.
Tax Prophet's Articles on Off-Shore Asset Protection TrustsThese trusts do not save U.S. taxes and, evidently, offer much less protection than their promoters would have you believe. See the Tax Prophet's -- December, 2002 - Hot Topics - Update on Asset Protection Planning, part 2 of a 2-part series
November, 2002 - Hot Topics - Update on Asset Protection Planning, part 1 of a 2-part seriesAugust, 2000 - Hot Topics- The Demise of the Off-Shore Tax Haven Industry, part 2 July, 2000 - Hot Topics- The Demise of the Off-Shore Tax Haven Industry, part 1 September, 1999 - Hot Topics - Asset Protection Industry - Expensive and Wasteful Exercise in Wishful Thinking - part 2 August, 1999 - Hot Topics- Asset Protection Industry, Expensive and Wasteful Exercise in Wishful Thinking - part 1 October, 1998 - Hot Topics article: Off-Shore Asset Protection Trusts - Part 2. July, 1998 - Hot Topics article: Off-Shore Asset-Protection Trusts - Part 1 Note: The American Bar Association's Journal, October 1998, contains a lengthy article, "Island Castaway," which discusses how off-shore asset protection trusts are being used to hide money in divorce cases. In one case, a judge found that the crime-fraud exception to the attorney-client privilege existed and ordered attorneys to answer questions regarding the trust. The implications are clear: attorneys who create or implement these trusts could be engaging in criminal fraud.
Links to Anti-Trust Scam and Anti-Tax Protester WebsitesNote: These links are provided as a courtesy to you. Use at your own risk and verify the credentials of those providing the information. The Tax Prophet does not endorse these sites and takes no responsibility for the accuracy of the information provided at these sites. A competent tax professional licensed in your state should always be consulted before utilizing any of the information contained at these sites.
Other Anti-Fraud Websites:The Militia Watchdog has published an in-depth analysis involving the connection between trust scams and the right-wing militia groups operating in the U.S. -- see: Trusts and the Untrustworthy, "Pure Trusts" and the "Patriots for Profits." This website is also an excellent resource that explains the thinking (I know, "thinking" is an oxymoron) of the right-wing extremist movement in the U.S. The Militia Watchdog is devoted to monitoring right-wing extremist groups in the U.S and lists current tax protester and sovereign citizen websites. Also, a must read for researchers is The Militia Watchdog's Idiot Legal Arguments (An excellent although ponderous reference source containing hundreds of court citiations refuting a multitude of tax protester and extremist claims.) The Law Enforcement Agency Resource Network - Extremism in America - describes the history of the tax protester movement, as well as short biographies on some of the movement's notorious characters. Why You Shouldn't Trust National Trust Services. A website posted by Roger M. Wilcox who claims he got burned by National Trust Services ("NTS") to the tune of $9,500 for a worthless trust. The author thoroughly dissects NTS's claims that their trusts are legitimate. The author's advice, "Don't trust NTS any farther than you can throw Roy Fritts." Must reading for those involved with NTS or similar scams. Traps and Scams: A description of tax and estate planning frauds and scams. With respect to pure trusts and constitutional trusts, the author says, "Pure fraud. These trusts, known in the trade as 'Con Trusts' because they are advanced by Con Men, don't work and they get you in trouble. Several circuit courts have labeled them fraudulent as a matter of law " Note: Although the Tax Prophet disagrees with this site's promotion of asset protection, there is important information regarding frauds and scams.
Links to other anti-fraud tax and financial websites. Regarding pure trusts, this website contains my favorite quote, "Great things, so long as the IRS and your creditors agree to litigate issues arising from these [pure or constitutional] trusts before a Posse Comitatus in a mobile home trailer somewhere. Otherwise, a voodoo spell would be more effective protection."
IRS Criminal Investigations Division Revamps Its Website
CID's Website now contains a lot more information pertaining to tax fraud and abusive trust matters, including the telephone number to report suspected tax fraud -- (800) 829-0433. CID has targeted Trust Scams and the generic Tax Protestor for criminal investigation. That means jail, if caught and convicted, and this bunch rarely loses in court, especially on tax fraud cases. It's webpage warns: "Promoters of abusive trusts can lead innocent taxpayers to financial ruin. The bottom line: 'Don't Buy In!' " Also, check out CID's newly-added Abusive Tax Schemes section and its Tax Fraud Alerts.IRS Tax Scams -- Consumer Alerts is an updated list waring unsuspecting taxpayers of the current tax scams floating around.
Scam Watch: An Internet anti-scam watchdog group. Check out its comprehensive listing of websites that are protecting the public against fraud.
Searching the Internet for Trust Scam Webpages
The following search engines should produce a list of the latest trust scam webpages on the Internet. Note: Not all pages listed involve trust scams. Some anti-scam websites as well as pages that have nothing to do with trust scams will also appear. Using the term "pure equity" seems to produce the most focused searches:Google Search Yahoo Search
Other Anti-Tax Protester Websites:Debunking the Federal Reserve Conspiracy Theories by Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C. Tax Protesters and others in the lunatic fringe elements absolutely hate the Federal Reserve and have developed numerous paranoid conspiracy theories regarding this government institution. This website exposes those conspiracy theories as worthless. The Tax Protester FAQ: An excellent and detailed rebuttal of the most prevalent tax protestor arguments. There's an excellent FAQ on the utter failure of the more notorious tax protestors in their senseless and frivolous claims against the IRS. Excellent resource for those researching arguments opposing the myriad frivolous tax protestor arguments. Tax Protestor Theories Debunked.. A section of the Quatloos Website published by Jay Adkisson, which combines solid rebuttals to the typical tax protestor arguments with humorous ridicule of the leaders and suckers which involve themselves in such asinine endeavors. The U.S. Justice Department's Synopsis on Tax Crimes provided an easy to use outline of how the prosecution argues tax protestor cases. All the typical tax protestor arguments are debunked with the appropriate court cases and statutes cited as authority. Kerry M. Kerstetter's Tax Protestor Arguments -- a succinct (2 page) three-column table of common tax protestor arguments, the law and relevant cases.