What are Abusive Trust Tax Evasion Schemes?

There are two basic schemes that promotors might use, which are:

A domestic package in an abusive trust tax evasion scheme typically includes:

• Trust documents: The promoters will help you set up trusts, which are legal entities that hold assets on behalf of beneficiaries. In this scheme, the trust structure is intended to be confusing and layered, making it seem like you don’t control your income (which is untrue).
• Domestic trustee: This could be someone designated by the promoter to act as the trustee of your trust. The idea is to distance yourself from the trust’s assets further (again, for misleading purposes).
• Tax return preparation: Some schemes may include help with filing tax returns using the newly created trust structure. It’s important to remember that these returns will likely be misleading and could lead to serious trouble with the IRS.

It’s important to understand that these domestic packages are illegal and do not work. The IRS is aware of these schemes and actively pursues those who participate in them.

A foreign package in an abusive trust tax evasion scheme typically involves setting up a series of trusts and entities in foreign countries, often tax havens known for secrecy. These countries may have little to no tax on trusts. Here’s a breakdown of how it works:

• Multiple Trusts: The promoter will help establish several trusts, usually in different countries.
• Tax Haven Countries: These trusts are often created in countries with lax tax regulations and banking secrecy laws.
• Funneling Money: Money is then funneled through these trusts, creating a complex web that makes it difficult for tax authorities to track the income.
• Fake Expenses: The scheme may involve creating fake expenses or inflating legitimate ones to reduce the taxable income shown in each trust.
• Maintaining Control: While the ownership appears to have been transferred, the taxpayer often retains a significant degree of control over the assets through the trust structure.

Essentially, the goal is to make the income appear to disappear through a web of foreign trusts, allowing the taxpayer to avoid paying taxes.

It’s important to remember that these schemes are illegal and can result in hefty fines and even jail time. If you’re approached with a tax reduction plan that involves foreign trusts, it’s best to consult with a reputable tax advisor to ensure you’re not getting involved in something illegal.

This is a legal principle that says the underlying reality of a situation matters more than the technical details. The U.S. Supreme Court has stated that it is the substance and not the form of a transaction that is controlled for the purpose of taxation. In other words, this means the IRS cares more about the true nature of a financial transaction than how you try to structure it on paper to minimize your taxes.

Tax whistleblowers with solid information of a sham trust evasion scheme may be eligible for a whistleblower award. Under Section 7623(b), the award amount is generally 15 to 30% of the proceeds collected in a successful recovery by the IRS. Under Section 7623(a), awards are discretionary and may be less than 15%. The IRS applies IRC Section 671 (grantor trust rules), IRC Section 482 (transfer pricing regulations), and Treasury Regulation 301.7701-4 to disregard abusive trust arrangements that lack economic substance.

There are several factors the IRS considers in determining award eligibility:

• $2 Million Threshold: The tax noncompliance must exceed $2,000,000 – this includes taxes evaded, penalties, interest, and other fees. If the trust scheme is related to a single taxpayer who has a gross income exceeding $200,000 for at least one tax year in question.
• Qualify of Information: The IRS is seeking original, specific, and credible information. Award amounts decrease for claims based on information from public sources OR if the whistleblower was involved in the tax noncompliance.
• Internal Revenue Code Section 7623(b) or 7623(a): A whistleblower submission must meet the criteria for IRC Section 7623(b). If it does not, the IRS may consider it for their discretionary program under IRC Section 7623(a).

Financial awards are also available to non-U.S. citizens who blow the whistle on U.S. taxpayers involved in foreign abusive trust tax trust schemes. However, these whistleblowers must be accompanied by a U.S-based attorney.

Those who are employees of the Department of Treasury or receive information through their official duties as an employee or as a contractor of the federal government are excluded from receiving awards under the program.

Have information? Learn more about the IRS Whistleblower Program and get in touch with a reputable IRS whistleblower attorney for legal assistance.

Since the inception of the IRS whistleblower program, our firm has been behind around one third of all IRS whistleblower cases, including one of the most notorious tax whistleblower reward cases in history (Bradley Birkenfeld, $104 million). If you’re seeking an experienced ally you can absolutely trust, look no further than Kohn, Kohn & Colapinto LLP.