This article is
in line with my program to; Get it, Grow it, and Keep it...it's
your money, if you don't protect it, no one else will. There
is a lot of bad advice being given to good people. But, you
must protect your money by educating yourself before you
seek the advice of tax professionals. This article is directly
from the Internal Revenue Service, on it's website it is
followed by the jail terms given to many everyday citizens
who did not educate themselves in the area of taxes and relied
on the wrong people for advice.
"Caveat Emptor" This principle
of commerce applies to the services and products you buy
to complete your tax
returns. Whether you are doing your own tax returns or having
someone else do them for you, protect yourself by learning
about the latest frauds and hoaxes.
In the last few years the Internal
Revenue Service Criminal Investigation (CI) has detected
a proliferation of abusive
trust tax evasion schemes. Currently, there are two prevalent
fraudulent schemes being promoted: the "domestic scheme" and
the "foreign scheme." The domestic scheme involves
a series of trusts that are formed in the U.S., while the
foreign trust scheme is formed offshore and outside the jurisdiction
of the U.S. The trusts involved in the schemes, either foreign
or domestic, are vertically layered with each trust distributing
income to the next layer. The result of this layered distribution
of income is to fraudulently reduce taxable income to nominal
amounts. Although these schemes give the appearance of the
separation of responsibility and control from the benefits
of ownership, these schemes are in fact controlled and directed
by the taxpayer.
These schemes are often promoted by a network of promoters
and sub-promoters that may charge $5,000 to $70,000 for their
packages. This fee enables taxpayers to have trust documents
prepared, to utilize foreign and domestic trustees as offered
by promoters, and to use foreign bank accounts and corporations.
In some instances, tax return preparer services are also
made available.
Basic Trust Taxation
To understand fully the trust schemes offered today, it
is important to focus on some basic trust taxation rules.
A trust is a form of ownership, which is controlled and
managed by a designated independent trustee, that completely
separates responsibility and control of assets from the benefits
of ownership. The IRS recognizes numerous types of legal
trust arrangements, and they are commonly used for estate
planning, charitable purposes, and holding assets for beneficiaries.
The independent trustee manages the trust, holds legal title
to trust assets, and exercises independent control.
All income a trust receives, whether from foreign or domestic
sources, is taxable to either the trust, the beneficiary,
or the taxpayer unless specifically exempted by the Internal
Revenue Code (IRC).
A legitimate trust is allowed to deduct distributions to
beneficiaries from its taxable income, with a few modifications.
Therefore, trusts can eliminate income by making distributions
to other trusts or other entities as long as they are named
as beneficiaries. This distribution of income is key to understanding
the fraudulent nature of the abusive schemes. In fraudulent
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 fraudulent deductions is to reduce the amount of income
ultimately reported to the IRS.
A domestic trust must file a Form 1041, U.S. Income Tax
Return for Estates and Trusts, for each taxable year. If
the trust is classified as a Domestic Grantor Trust, it is
not generally required to file a Form 1041, provided that
all items of income are reported by the individual taxpayer
on his own Form 1040, U.S. Individual Income Tax Return.
Thus, the individual pays the total tax liability upon the
filing of his return for that taxable year. All income received
by a trust whether from foreign or domestic sources is taxable
to the trust, beneficiary, or taxpayer unless specifically
exempted by the Internal Revenue Code.
Foreign trusts are subject to special filing requirements.
If a trust has income that is effectively connected with
a U.S. trade or business, it must file Form 1040NR, U.S.
Nonresident Alien Income Tax Return. Form 3520, Annual Return
to Report Transactions With Foreign Trusts and Receipt of
Foreign Gifts, must be filed on the creation of or transfer
of property to certain foreign trusts. Form 3520-A, Annual
Information Return of Foreign Trusts With U.S. Owner, must
also be filed annually. Foreign trusts may be required to
file other forms as well. Foreign trusts to which a U.S.
taxpayer has transferred property are treated as grantor
trusts as long as the trust has at least one U.S. beneficiary.
The income the trust earns is taxable to the transferor under
the grantor trust rules. Grantor trusts are not recognized
as separate taxable entities, because under the terms of
the trust, the grantor retains one or more powers and remains
the owner of the trust income. In such a case, the trust
income is taxed to the grantor.
In addition to filing trust returns as just described, a
taxpayer may be required to file U.S. Treasury Form TD F
90-22.1, Foreign Bank and Financial Accounts Report if the
taxpayer has an interest of over $10,000 in foreign bank
accounts, securities, or other financial account. Also, a
taxpayer may be required to acknowledge an interest in a
foreign bank account, security account or foreign trust on
Schedule B, Interest and Dividend Income which is attached
to Form 1040.
Abusive Domestic Trust Schemes
As stated above, the domestic trust schemes are usually
offered in a series of trusts that are layered upon one another.
These trusts can include the following:
Asset Management Company : In many
promotions, taxpayers are advised to create Asset Management
Companies (AMC’s).
The AMC, which lists the taxpayer as the director, is formed
as a domestic trust. An individual on the promoter’s
staff is usually the trustee of the AMC, but this individual
is quickly replaced by the taxpayer. The purpose of the AMC
is to give the appearance that the taxpayer is not managing
his or her business and to start the layering process.
Business Trust - The next step is to form a business trust,
also a domestic trust. In effect, the client elects to change
the structure of their business from either a sole proprietorship
or corporation to a trust. The AMC is the trustee of the
business trust. False administrative expenses may be deducted
from the trust as a means to reduce taxable income. The scheme
gives the appearance that the taxpayer has given up control
of their business to a trust; however, in reality the taxpayer
is still running the day-to-day activities of their business
and is controlling its income stream.
Equipment or Service Trust - An equipment or service 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.
Family Residence Trust : In some instances, taxpayers are
being advised to distribute remaining income from the business
trust to a family residence trust. Family residences, including
furnishings are transferred to this trust. These trusts sometimes
rent the family residence back to the owner. These trusts
may attempt to deduct non-allowable depreciation and the
expenses of maintaining and operating the residence such
as gardening, pool service, and utilities.
Charitable Trust : In many promotions, the last layer of
trusts is the charitable trust. These trusts or "charitable
organizations" pay for personal, educational, or recreational
expenses on behalf of the taxpayer or family members. The
payments are then falsely claimed as "charitable" deductions
on the trust tax returns. After the personal and non-allowable
expenses are deducted from the charitable trust, any remaining
balance of income, usually nominal amounts, is distributed
to the taxpayer.
Abusive Foreign Trust Schemes
Similar to the domestic arrangements,
foreign packages usually start off with an AMC, a business
trust, and distribute income
to several trust layers. However, these foreign promotions
also attempt to take funds offshore and outside U.S. jurisdiction.
These schemes involve offshore bank accounts, trusts, and
International Business Corporations (IBC’s) created
in "tax haven" countries.
Brought to you by author, Lois
Center-Shabazz
Article
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