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.
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