In its "Abusive Trust Tax Evasion Schemes – Facts", the Internal Revenue Service estimates that trusts will account for much of the $4.8 trillion to be inherited or transferred between the generations by 2015.  According to that same publication’s Talking Points, trusts are now sometimes fraudulently used: 

  • To depreciate personal assets (such as a home);
  • To deduct personal expenses;
  • To split income over multiple entities, often filed in multiple locations;
  • To underreport income;
  • To avoid filing returns;
  • To wire income overseas and fail to report it; and
  • To attempt to protect transactions through bank secrecy laws in tax haven countries.

Insurance salesman Denny Patridge’s June 30, 2005 conviction for tax evasion, wire fraud, and money laundering, is one example of how trusts can be used to hide assets and commit tax fraud.  At page four of its Enforcement Results, the Department of Justice’s Tax Division mentions that Patridge was fined $100,000 and sentenced to sixty months because he had used: a trust to conceal assets; a false lien on his home; nominee bank accounts; and offshore accounts in Belize and Antigua.

Unlike Mr. Patridge’s scheme, some abusive trusts are entirely based on domestic financial transactions.  Such was the case of Marvin Swanson, sued in February 2004, by  the U.S. Justice Department for offering asset protection/tax evasion services.  According to the November 15, 2006 permanent injunction issued pursuant to 26 U.S.C. § 7402 against him, Mr. Swanson had sold phony trusts called "unincorporated business trust organizations" through his manual and website.  As the November 15, 2006 injunction explains, Mr. Swanson had established corporations in Nevada in order to provide his clients with anonymity and hide their assets from the Internal Revenue Service.

The January 11, 2007, Complaint for an injunction against Victor Carlysle Sullivan alleges that Mr. Sullivan as a CPA had an asset protection service that hid monies first through a domestic trust known as the Tuxedo Trust and then in two offshore trusts called Blackshear and Bulldog.  Also according to the Complaint, Mr. Sullivan had cost the U.S. Government an estimated $5 – $10 million by underreporting the taxes of at least 53 of his clients in his sham-trust scheme started in 1998.  On March 22, 2007, Mr. Sullivan did however agree to his Stipulated Permanent Injunction, which bars further illegal conduct and essentially obligated him to provide the Government with his client list for the past ten years.   

Given all of the above, the Internal Revenue Service has ranked trust misuse as eighth in its 2007 Top Dirty Dozen Tax Scams.  To educate the public about abusive trusts, It also published "Should Your Financial Portfolio Include Too Good To Be True Trusts?".  Furthermore, when the medical community was  targeted by asset protection service providers, the Internal Revenue Service published a February 2002 bulletin to especially address the issue.  Fraudulent trusts however, are not just limited to tax evasion as they can also play a role in schemes to hide assets during a divorce, bankruptcy, debt collection proceeding, etc.

Copyright 2007 Fred L. Abrams