In March 2024, the IRS updated a series of toolkits for external stakeholders revolving around abusive trust tax evasion schemes, offering a background of the schemes, related laws, instructions, and action.
Trusts are used to make transfers of substantial assets from one generation to the next. Though these transactions are often legitimate, the IRS is warning of an uptick in abusive trust tax evasion schemes targeted towards wealthy individuals, characterized by the transfer of wealth under the form of vehicles, boats, and businesses. Abusive trust tax evasion schemes involve exchanges that attempt to conceal the taxpayer’s identity, real income, and transactions.
Indicators of Abusive Trust Tax Evasion Schemes
- False promises: Financial advisors often tell their targets that this strategy reduces the income subject to tax, self-employment taxes, estate taxes, or deducts personal expenses paid by the trust.
- Creation of multiple trusts: Fraudsters may involve multiple trusts which are vertically layered in which each level successively distributes income to the next level.
- “Package” deals: Financial advisors may promote a domestic or foreign package for $5,000 to $70,000 to cover fees associated with opening foreign bank accounts.
Types of Schemes
- Domestic: including trust documents that attempt to obfuscate the trust structure, a trustee to distance the owner of their funds, and misleading tax returns. However, these tactics are highly ineffective, and the IRS can trace the account that controls the income.
- Foreign: opening various trusts and entities across foreign countries (especially tax havens with few tax regulations and lax bank secrecy laws), inflating expenses to reduce taxable income within the trust, and creating a webbed structure with these trusts.
Blowing the Whistle on Abusive Trust Tax Evasion Schemes
- Taxpayers and tax practitioners may report violations to the IRS Whistleblower Office and may be eligible to earn significant monetary awards.
- Individuals with original and actionable information involving a tax evasion scheme may be eligible for 15% to 30% of the amount recovered by the IRS. In this case, the tax noncompliance must exceed $2,000,000.
- Whistleblowers do not have to be U.S. citizens to blow the whistle on U.S. taxpayers, but they have to have a U.S.-based attorney.
- Individuals are encouraged to mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers to IRS Lead Development Center in the Office of Promoter Investigations.
Whistleblowers seeking legal advice may contact Kohn, Kohn & Colapinto for a consultation.
KKC has been the driving force behind one third of all IRS whistleblower cases, and represented Bradley Birkenfeld who blew the whistle on UBS, one of the biggest Swiss international banks, earning the largest ever individual qui tam award of $104 million.
