Offshore Trusts - Tax Evasion Investments
TrustsBy: Bill E. Branscum
Copyrights 2000, 2001 & 2002
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.
Reprinted with the kind permission of Bill Branscum at www.fraudsandscams.com