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Suppose
you win the lottery and find yourself sitting at your kitchen
table looking at ten million dollars, after taxes. That money
is yours, free and clear, but knowing what a litigious society
we all live in, you know that every mutt that ever met you,
thought they met you, or thinks they thought they knew someone
that might have met you, is going to try to figure out some
way to sue you for a piece of your pie.
Now
suppose you have four children - wouldn't it be nice to figure
out some way to make sure that, no matter what else happens,
they will have the benefit of your windfall when they grow
up - have I got a deal for you!
You
are going to give away five million dollars - no kidding,
give it completely away - to me. You (the Grantor) are going
to hand that money over to me (the Trustee) and I am going
to deposit it in First National Bank in the name of the Trust
Me Trust. We are going to draw up an agreement that says I
get paid 100 a week to manage the Trust Me Trust until your
children (the Beneficiaries) become twenty-five years old.
Now,
suppose I tell you that we must draw this up so you have absolutely
no claim on the money, no way to get it back, no control at
all and, because you gave up the money, completely and irrevocably,
nobody can sue you for it, any interest earned on that money
isn't yours, and you pay no taxes on it. What do you think?
Okay,
my mother wouldn't trust me with $5 million either, but other
than that, it's all perfectly legit and, if done correctly,
probably a smart move. That is your basic Trust in a nutshell.
A Trust is a form of ownership in which a Grantor (also called
a Settlor) transfers an asset to a third party Trustee who
manages that asset on behalf of the Beneficiaries.
It
is a common practice in estate management, and perfectly legal,
so long as the Trust documents are drafted in compliance with
the Internal Revenue Code, §§ 641-683. Trusts are
typically used in estate planning as a way to transfer assets,
protect assets, or hold and manage assets for the benefit
of minors, or others who cannot responsibly manage their own
affairs.
If
it still seems complicated, before you let your eyes glaze
over, believe me when I tell you that the concept of "Trusts,"
as it is of interest and concern to us as investigators, is
much simpler to grasp than you might think. Invariably, our
Clients come to us because they got involved in some scheme
related to asset protection and/or taxation.
Although
it may seem likely to be the most complicated aspect, taxation
issues are actually the the easiest to assess. All you really
need to know is, you cannot use Trusts to evade/avoid
taxes - period. Why? Because tax evasion is illegal.
Whether
they call it an Offshore Asset Protection Trust (OAPT), a
Rabbi Trust, a Patriot Trust, a Spendthrift Trust, an Inter
Vivos Trust, a Freedom Trust, a Constitutional Trust, a Pure
Trust, A Foreign Grantor Trust, or a Pure Inter Vivos non
discretionary Intergalactic Irrevocable Blessed by the Virgin
Mary Trust - unless your Client genuinely gave up all claim
to the assets, the Trustee has full legal title to them, and
the Trustee exercises completely independent control, the
IRS calls it an Abusive Trust.
These
Days, the IRS Criminal Investigations Division is actively,
and aggressively targeting these Abusive Trust Schemes. Your
Clients really should read this New York Times article
dated September 13, 2002: IRS
News
"Oh,
but this Trust was set up under the laws of Belize with
a Foreign Fiduciary, an Intermediatory Independent Protector,
a Transvestite Trustee from Transylvania, Bona Fide Bearer
Beneficiary Certificates and . . ." and
nothing! If your Client bought into it as a way to conceal
assets and evade taxes, it isn't legal.
Could
it be any simpler? When your Client comes to you with this
wonderfully clever Foreign Grantor Trust document, nineteen
pages long, complete with gold foil seals that he bought into
after paying $1250 to learn the "secrets" necessary
to put it to use, and he asks you if it will make it possible
for him to conceal his assets, and thereby legally avoid paying
taxes, the answer is "No!"
That's
not legal advice - it's reality and it matters not one whit
what the attorney, CPA or Minister who is pushing this nonsense
says. In the cases that follow, you will have ample examples
of trust promoters representing those professions going to
jail.
If
your Client had come to you with some long, drawn out, complex,
convoluted strategy that he spent big bucks for, purporting
to make it possible for him to legally murder his neighbor,
would you need an attorney to review it? Of course not, murdering
your neighbor isn't legal - period. Neither is evading taxes.
It
really is this simple. The complicated part is convincing
your Clients that they spent all that time and money on a
ticket to IRSville where the entertainment consists of fines,
penalties, forfeitures and jail time - not to mention legal
expenses that can defy imagination. Some of these people never
do believe it until they hear the testimony of the government's
star witness - the guy who sold them their trust.
That's
usually how they get caught too. When the abusive trust promoter
is caught, he has the choice - cooperate or spend a good bit
of his life in a concrete box. People are always shocked and
dismayed when their buddy, their pal, the expert they trusted
to know it all, the guru that charged them all that money,
turns them in and testifies against them. It amazes me that
it amazes them -- it only happens 100% of the time.
There
are a number of governmental publications that will assist
you in leading your Clients to the harsh, bright light of
grim reality. The IRS has made every effort to warn taxpayers
to stay away from these promoters. Here is the warning available
on the IRS web site:
IRS
Warning 97-24.
Older Clients invariably seem to feel that their age will
protect them from criminal prosecution, "What's the
IRS going to do to a man my age?" They should consider
the case of Anthony Arnold Mitchell and his wife, Dorothy
May Mitchell who bought into the "Genesis Fund"
Offshore Trust scheme promoted by the "We the People"
organization. It was the standard regimen involving the deposit
of funds into an offshore account - in this case, it was the
Guardian Bank & Trust located in the Cayman Islands. As
is usually the case, the Mitchell's were able to continue
to access their money by means of a VISA debit card and this
wonderfully clever scheme worked just fine and dandy - until
it didn't.
Here
is a copy of the
docket from
the criminal case filed in US District Court in 2002 and a
copy of the Press
Release issued by the Office of the United
States Attorney in May of this year.
Note that Anthony Mitchell is 78, and his wife is 74 and look
at the history of their problems. Here is the Mitchell
Tax Court Appellate Case stemming from
their effort to hide the proceeds of the sale of their aircraft
in a Swiss account in 1988.
These
two people have spent the last fifteen years of their lives
fighting with the government - and losing. Can you imagine
what they have spent in litigation? Now, after all that, they
face fines, penalties and prison. Tell your Client, "THAT'S
what the IRS can do to a man your age."
For purposes of comparison, numerous examples of abusive trust
schemes can be found on the web. As a general rule, the "Settlor"
establishes a Trust offshore under the laws of Belize, Nevis,
Panama, etc., the Beneficiary is whomever happens to be holding
the "Bearer" Beneficiary Certificate, there are
no copies of the Trust documents other than the one provided
to the Settlor, and the Settlor continues to have access to
their money via some sort of debit card provided by company
that sets up the trust.
This
doesn't even qualify is ingenious - ridiculous is the word
that comes to mind.
Look
these advertisements over very carefully for a reference to
the fact that a US citizen cannot just send their money offshore.
The US citizen that creates certain foreign trusts, or transfers
property to them, must file an, Annual Report to Report
Transactions with Foreign Trusts, IRS Form 3520.
The
offshore trusts can have IRS filing requirements too. If they
have income that is connected with a US trade or business,
they must file a Nonresident Alien Return, IRS Form
3520 and then there's the Annual Information Return of
Foreign Trusts With U.S. Owner, IRS Form 3520-A.
That's
not all. If a US citizen has an interest in any foreign account,
whether it is securities, or a cash account, and the value
exceeds $10,000, they must file a U.S. Treasury Form TD F
90-22.1, and they may be required to identify their interest
in these accounts on IRS Form 1040, Schedule B, to declare
any interest earned.
I
have had Clients say, "Oh well, that cannot be a
problem because there is no way the IRS can find out."
The promoters have assured them that banking laws wherever
the money is kept assure absolute secrecy, "The IRS
can demand all they want but the bank won't tell them a thing."
Have
your Client sit down.
The
IRS has recently been issuing "John Doe Subpoenas,"
and serving them upon the credit card companies, demanding
the records of all accounts where the issuing bank is in (you
pick the haven) and the transactions are in the United States.
The results have been dramatic - VERY dramatic.
Further,
the IRS has been aggressively pursuing undercover operations
targeting promoters. For example, in the Anderson's Ark case,
one of the biggest promoters busted thus far, the IRS spent
years and "laundered" hundreds of thousands of dollars
developing their cases against the principals. They are now
working through the records prosecuting the Anderson Ark client
base. You can read about it here: Anderson's
Ark
As
I stated previously, these scams can be presented by people
with impressive credentials. Just because the promoter is
a CPA, an attorney or a "household name" does not
mean they are honest.
In
May 1999, Ronald Chappell, a former CPA from Roseville, California,
was sentenced to 87 months imprisonment for defrauding the
IRS by promoting bogus trusts. Attorney Todd Gaskill was sentenced
to 58 months, and politically connected Lloyd Winburn was
sentenced to 63 months for their roles in promoting these
trusts. Clients of these individuals put businesses, homes,
and other assets in trusts, but in fact continued to control
those assets. In another scheme directed at high income taxpayers,
Chappell, Gaskill, and Goodrich instructed clients to conceal
income from the IRS through a series of bank accounts in the
U.S. and the Caribbean. You can read more about it here:
Chappell
Case
In
February 1998, 76 year-old Louis R. Mayer of Clearwater, Florida,
was convicted of conspiring to impede and impair the IRS from
administering the tax laws. Mayer was also convicted of six
counts of aiding and assisting in the preparation of false
income tax returns. The indictment charged Mayer, a promoter
of foreign and domestic contractual trusts, with employing
a series of trusts to generate fraudulent deductions and conceal
the income of two of his clients from the IRS. These trusts
created the appearance that the clients had relinquished ownership
and control of the assets which were placed in the trust,
when in fact they still retained control. Mayer also counseled
his clients to open a series of foreign bank accounts in the
Bahamas to facilitate the return of the income to his clients.
You can read more about it here: Mayer
Case
In
June 1999, Edgar Bradley and his sons, Edgar Bradley II and
Roy Bradley, were sentenced to 60, 57, and 46 months imprisonment
followed by 3 years supervised release, respectively for conspiracy
to defraud the IRS and for failing to file tax returns. In
an attempt to conceal income, the Bradleys, who were found
guilty by a Federal jury, assigned their income to several
nominees and purported irrevocable trusts that had no economic
substance. As part of the conspiracy, the Bradleys used several
bank accounts opened in trust and other names to conceal insurance
commission receipts and proceeds from the sale of certificates
of deposit and coins. The Bradleys also attempted to conceal
their assets from the IRS by the conveyance of real property
from their names to bogus trusts. In addition to their imprisonment,
the judge in the case ordered the Bradleys to pay fines of
$413,500 and restitution in excess of $635,000 to the IRS.
You can read more about it here: Bradley
Case.
I
particularly like to introduce Clients who think they know
it all to the case involving Pedro Ivan Rivera, a anesthesiologist
from Carrolton, Texas. In January 1999, Rivera was sentenced
to 37 months imprisonment followed by three years supervised
release and ordered to pay $414, 819 in restitution to the
IRS for tax evasion for the years 1992 to 1996. Rivera was
a clever guy who created trusts, including one for his family
residence, that he controlled and used to conceal his income.
He had a wonderfully byzantine scheme whereby he transferred
funds between trusts, offshore corporations, and their corresponding
bank accounts in the Bahamas, and the Channel Islands in order
to conceal taxable income. He did research and refused to
accept that the government had a right to make him pay taxes
and basically told the judge off - you can read more about
this fabulous exercise in poor judgment here: Rivera
Case.
For
those true believers who join organizations like the "Liberty
Foundation" and promote their "untaxing packages,"
there's the case of James C. Morris from Cincinnati, Ohio.
In July 1999, Morris was sentenced to 24 months imprisonment
followed by 3 years of supervised release for tax evasion
and for attempting to interfere with the administration of
the IRS. Morris used nominee trusts to conceal his income
and assets from the IRS and sold these programs to others.
Morris admitted he was a member of the Pilot Connection Society,
and its successor, the Liberty Foundation, that promoted these
"untaxing packages." In addition to imprisonment,
the judge ordered Morris to pay a $5,000 fine and restitution
to the IRS in the amount of $41,686; most significantly, Morris
appealed the sentence enhancement due to the "sophisticated
means" he used. You can read more about it here:
Morris
Case.
Karl
Foster was a professional tax consultant from Blaine, Minnesota
who created and sold offshore trusts calculated to conceal
income and assets from the IRS. Foster advised his clients
that trusts were tax free because they were sovereign from
the U.S., was convicted of conspiracy to obstruct the IRS,
aiding and assisting in the filing of a false tax return and
aiding and abetting another person to obstruct and impede
the IRS. In May 1998, Foster was sentenced to 78 months imprisonment
followed by three years of supervised release.You can read
more about it here: Foster
Case.
One
might think that a person would be insulated from criminal
charges if they followed the advice of a professional tax
consultant. Two of Foster's clients believed that until they
were convicted of tax evasion and conspiracy to obstruct and
impede the IRS - actually, if you read the case, these people
went right on believing it and argued most of the worn out
tax protester rhetoric known to man. Darlow Madge, was sentenced
to 41 months imprisonment and her son, Brian Madge, was sentenced
to 20 months imprisonment for following his tax "advice."
You can read more about it here: Madge
Case.
Don't feel bad if, no matter what you do or say, these tax
protester acolytes continue to believe. Darlow Thomas Madge
is a magnificent example of tenacious stupidity - in spite
of adverse rulings and sanctions for bringing frivolous arguments,
he pressed and pled this nonsense in Tax Court, District Court,
the Circuit Court of Appeals and the US Supreme Court. Certiorari
was denied in October 2002.
The IRS has declared war on these Abusive Trusts and it's
a war that they will win like "shooting fish in a barrel."
On April 10, 2002, the Department of Justice announced their
"crackdown" on Abusive Trusts. IRS Commissioner
Charles Rossotti is quoted as saying, "Promoters can
entice taxpayers into abusive trust schemes by making promises
that are too good to be true. Getting involved in such schemes
can be a costly mistake for taxpayers. Before entering into
any arrangements, make sure you consult with a reputable,
trusted tax professional for advice. Taxpayers who want to
report possible schemes can call the IRS at 1-800-829-0433."
Read the DOJ
Press Release
What
does all of this mean for us as investigators?
It
means dealing with the fallout resulting from the fact that
the party is over. For years and years these clowns have been
preaching tax protest rhetoric at seminars to people who pay
enormous amounts of money to buy trouble represented to be
the, "secrets of the rich."
For
those who may not be familiar with the way in which the government
will deal with this, it's simple. They will target promoters
of these trusts, who are readily identifiable on the Internet.
An
internet search reveals thousands like these:
I have not had Clients involved with any of the above referenced
trust promoters, and I proffer no opinions as to their legitimacy,
or lack thereof. I suggest that you visit their web sites,
and those offering similar services, and see what they are
actually promoting.
With regard to trust promoter's claims that your Client's
assets are protected from creditors . . . the Anderson case
has set the standard that these cases are expected to follow.
This article is a PDF version of a web posting on www.quatloos.com.
I would encourage you to visit the web site as it is an excellent
site for investigative information. Read about the Anderson's
effort to hide assets Anderson
Case
In sum, when you find yourself dealing with a Client who
has gotten involved in these offshore trust packages, you
must first assess their exposure to liability. Their best
initial step is to contact an attorney familiar with the practices
of the IRS and get straight with them. The IRS is actively
looking for Complainants willing to testify, and your Clients
may find them much more willing to help them work thru their
tax liability issues than they may expect. Get the Client
right with the government, and then begin the process of recovering
their funds.
I welcome
your comments,
questions and suggestions.
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