There are a number of scams of which consumers should be aware. These can land you in trouble with the IRS, leading to penalties, fines and/or jail time.
Asset protection planning needs to be conducted with experienced and qualified professionals who know the law and conduct planning in accordance with all legal compliance requirements. When learning how to protect your assets, you want an experienced professional to guide you properly and legally.
Avoid any planners that claim to be able to reduce or eliminate tax liability. Paying taxes is the responsibility of each individual, if taxable income is not reported to the IRS, it is fraud. If at any time your asset protection plan involves underreporting or no reporting to your government, you can bet that your plan could land you in jeopardy.
We only recommend legal measures that can help you safeguard your wealth. If at any time your planner informs you that you can avoid tax liability because “the government will never know,” GET UP AND LEAVE. IMMEDIATELY! Below are some common scams that have riddled the industry and left many people in serious legal jeopardy.
Corporation Sole Scam
Some promoters are touting the “Corporation Sole” as a method of tax elimination and asset protection. However, the true reason for a corporation sole is to help religious organizations. They can operate with very few formalities that are often needed by business corporations. There are few, if any, tax benefits for the layman. Moreover, there is some lawsuit protection of the corporation is sued. But there is little protection, if any, when the people who control the corporation are sued.
Here is the truth about the corporation sole:
- When the people who control the corporation are sued, they can lose the corporation along with the corporate assets.
- Lawsuit protection is available if the church is sued if the liability occurs within the company.
- The English Crown is not a corporation sole.
- There are no extra tax benefits for a corporation sole that are not available to ordinary corporations or nonprofit corporations.
- A corporation sole needs to declare income on its tax returns, which is similar to any other corporation.
- The money that is paid to you by the corporation sole must be reported to the IRS. And you need to pay taxes on that money. Failure to declare taxes subjects you and the director(s) of the company to personal liability.
- Therefore, the corporation sole, is a legal entity. However, many of the claims that are made are little but fallaciousness. Claims are touted by uneducated individuals who are likely repeating the words that were garnered from other misguided asset protection promoters.
The Pure Trust Scam
Also called “Common Law Trust” or “Constitutional Trust”
Wesley Snipes fell for it. What else needs said? We all know what happened to him. The “Pure Trust” is the most common asset protection scam. In recent times, IRS has undertaken a national cooperative effort to address these fraudulent trust schemes.
For more details about the IRS policy regarding fraudulent trusts, read IRS Public Announcement Notice 97-24 which warns taxpayers to avoid fraudulent trust schemes that advertise bogus tax benefits. If it sounds too good to be true; it probably is.
A trust is a legal form of ownership that can separate responsibility and control of assets from the benefits of ownership. Trusts are used in such matters as estate planning; to facilitate the genuine charitable transfer of assets. Trusts are also used to hold assets for minors and those unable to govern their own financial affairs, such as mentally incapacitated elderly people. All trusts must comply with the tax laws as set forth by the Congress in the Internal Revenue Code, Sections 641-683. Violations of the Internal Revenue Code may result in civil penalties and/or criminal prosecution.
Civil sanctions can include a very harsh fraud penalty up to 75% of the underpayment of tax attributable to the fraud in addition to the taxes owed. Criminal convictions may result in stiff fines up to $250,000 and/or up to five years in prison for each offense. All taxpayers are responsible for payment of their own taxes as set forth by Congress regardless of who actually prepares their return. Trusts established to hide the true recipient of the income of those from whom taxes are legally due or to disguise the substance of financial transactions are considered Fraudulent Trusts.
False claims concerning same trusts can include the following:
- False Claim: Establishing a trust will reduce or eliminate income taxes or self-employment taxes. Truth: Taxes must be paid on the income or assets held in trust, including the income generated by property held in trust. The responsibility to pay taxes may fall to the trust, the beneficiary or the transferor.
- False Claim: You will retain complete control over your income and assets with the establishment of a trust. Truth: Under legal trust arrangements, you must give up significant control over income and assets. An independent trustee is designated to hold legal title to the trust assets, to exercise independent control over the trust, and to manage the trust.
- False Claim: Taxpayers may deduct personal expenses paid by the trust on their tax return. Truth: Nondeductible personal living expenses cannot be transformed into deductible expenses by virtue of assigning assets and income to a trust.
- False Claim: Taxpayers can depreciate their personal residence and furnishings and take them as deductions on their tax return. Truth: Depreciation of a taxpayer’s residence and furnishings used solely for personal use is not deductible by virtue of assigning the residence to a trust.
You Are Responsible
Taxpayers must take responsibility for their own actions. Should a taxpayer choose to participate in a fraudulent trust scheme, the taxpayer will not be shielded from potential civil and criminal sanctions and any asset protection is disregarded.
Don’t be misled by the word “trust.” Just because the name “trust” is associated with financial arrangements does not make it a legitimate trust. The following arrangements have been used to promote fraudulent trust schemes:
- Business Trust: This involves the transfer of an ongoing business to a trust. Also called an unincorporated business organization, a pure trust or a constitutional trust, it makes it appear that the taxpayer has given up control of his or her business. In reality, however, through trustees or other entities controlled by the taxpayer, he or she still runs day-to-day activities and controls the business‘ stream of income. Such arrangements provide no tax relief.
- Equipment or Service Trust: This trust is formed to hold equipment that is rented or leased to the business trust, often at inflated rates. The business trust reduces its income by claiming deductions for payments to the equipment trust. This type of arrangement has the same pitfalls as the business trust. It provides no tax relief and little or no asset protection.
- Family Residence Trust: Taxpayers transfer family residences, including furnishings, to a trust, which sometimes rents the residence back to the taxpayer. The trust deducts depreciation and the expenses of maintaining and operating the residence including, pool service and utilities. These expenses are not deductible and the IRS will disallow them.
- Charitable Trust: Taxpayers transfer assets or income to a trust claiming to be a charitable organization. The trust or organization pays for personal, educational, and recreational expenses on behalf of the taxpayer or family member. The trust then claims the payments as charitable deductions on its tax returns. These alleged charitable organizations often are not qualified and have no IRS exemption letter. Therefore, contributions are not deductible.
- Foreign Trust: These trusts often are located in foreign countries that impose little or no tax on trusts and also provide financial secrecy. Typically, abusive foreign trust arrangements enable taxable funds to flow through several trusts or entities until the funds are ultimately distributed or made available to the original owner. The trust promoter claims that this distribution is tax-free. In fact, the income from these arrangements is fully taxable.
Certified Asset Protection Consultant Scam
This scam is often structured as a pyramid scheme where potential asset protection consultants pay $10,000 to go to a weekend class and become a “certified asset protection consultant.” This certification is not worth the paper it is written on because it is not a true legal professional designation.
This program is a fraud for two reasons:
- Because it takes money from people to attend a class that one could learn for much less.
- It sets amateurs loose on the public who are ill trained to handle involved asset protection structures.
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