How to Protect Yourself: Tax Evasion Schemes
The Internal Revenue Service is cautioning the public about tax schemes that create "sham" trusts to evade federal taxes. In the last few years the IRS has detected a proliferation of abusive trust tax evasion schemes. The promotions, which are in some instances distributed by a national network of promoters, promise taxpayers substantial tax reduction and asset protection. In reality, these promotions are nothing more than complex tax evasion schemes.
Generally, a trust is a form of ownership that separates responsibility and control of assets from the benefits of ownership. The duties, powers and responsibilities of the parties in a trust are determined by state statute.
Promoters of abusive trust arrangements typically promise greatly reduced tax liabilities without any change in the taxpayer's control over--or benefit from--income and assets. The promised benefits may include:
- Reduction or elimination of income subject to tax;
- Deductions for personal expenses paid by the trust;
- Deductions of an owner's personal expenses paid by the trust;
- Depreciation deductions of an owner's personal residence and furnishings;
- A stepped-up basis for property transferred to the trust;
- The reduction or elimination of self-employment taxes; and,
- The reduction or elimination of gift and estate taxes.
All income a trust receives, whether from foreign or domestic sources, is taxable to the trust, the beneficiary, or the taxpayer unless specifically exempted by the Internal Revenue Code (IRC). In many cases, however, a legitimate trust is allowed to deduct distributions to beneficiaries from its taxable income. Therefore, trusts can eliminate income by making distributions to other trusts or other entities as long as they are named as beneficiaries.
In the abusive schemes, bogus expenses are charged against trust income at each trust layer. After the deduction of these expenses, the remaining income is distributed to another trust, and the process is repeated. The result of the distributions and deductions is a decrease in the amount of income ultimately reported to the IRS.
Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the Internal Revenue Service is actively examining these types of trust arrangements. Furthermore, taxpayers and/or the promoters of these trust arrangements may be subject to civil and/or criminal penalties.
If you have specific questions on a tax scheme or wish to report a possible scheme, call 1-866-775-7474 or send an e-mail to: firstname.lastname@example.org.