While we do reside in what many people believe to be the greatest country on Earth, the complicated nature of our nation’s tax structure provides individuals and business entities with the ability to take advantage of certain benefits and protections. The IRS has partnered with state authorities to help combat and minimize the prevalence of abusive tax schemes. This tax fraud task is reported to be a danger to our economy due to the illegal practices used to lower individual tax liabilities. JD Katz is here to be your reliable team of tax attorneys for Maryland and D.C. clients. Anyone facing heavy tax evasion penalties can benefit from gaining legal representation and expert tax advice for each stage of the process. Our versatile and experienced team will be able to provide comprehensive support to help you optimize our outcome in the case.

With an increased focus on fighting tax evasion across the country, it’s important to make sure that you are protected in case of an IRS investigation. Today, we’ll look at what an abusive tax scheme is and how people can face legal repercussions because of it.

What is an Abusive Tax Scheme?

This scheme, also known as an abusive tax shelter, is an investment fraud that relies on reducing an individual’s income tax without physically changing their income or assets. These schemes have improved over the decades to take advantage of the financial security offered by numerous foreign laws, all with the purpose of reducing tax liabilities. It can help to visualize an abusive tax scheme as an actual shelter, where money is invested elsewhere to protect the investor from their full tax responsibilities. The complexity of each scheme varies, ranging from simple depositing of cash receipts in foreign bank accounts to layered trusts and partnerships. The more complex a scheme is, the more likely it is to be successful.

Tax Scheme Strategies

There are many schemes that have been in place over the decades. Below are a few that have been compiled with the help of the IRS and their Criminal Investigation (CI) division.

International Business Corporations

The taxpayer in question will often create an international business corporation (IBC) with the same name of their business in order to qualify for international regulations. This will be paired in coordination with a foreign bank in order to provide a shelter from tax responsibilities. As the income comes in, the business owner will send the checks to their IBC. Customers who check their accounts will see a withdrawal from the business entity’s name and have no second questions as to where it was deposited. Once everything goes through, the IBC owner can utilize their capital in a foreign jurisdiction that holds no income reporting requirements.

False Billing Scheme

This approach consists of the taxpayer setting up their own IBC in a foreign country that is considered a tax haven. The goal here is to assign yourself as the owner of the business with you as the signatory on the account. The taxpayer will then invoice the business for goods and services that are purchased. This individual will then send their payment to the IBC, where they have joint access to the funds. This false reporting is done to reduce the taxpayer’s taxable income while also placing their money into a protected foreign bank account.

Foreign Trust Schemes

A general approach to a shelter scheme is to create system of domestic trusts with the intention of giving the impression that the taxpayer is no longer in control of their assets. However, once transferred to a domestic trust, the money is then moved to foreign accounts with the intention of avoiding taxes. This complicated process typically involves at least three trusts, where one is used for daily operations while another one is used to lease the business’ equipment back to the company at higher raters to zero out any income that is reported on their business trust tax form. Once this is done, your foreign trust can then move finances to the second foreign trust without the worry for reporting. The taxpayer has given the impression that they have lost any control of their finances, while in reality, they have had full control the entire time.

Abusive tax schemes have been under the IRS microscope for years now. From OVDP to reporting tax evasion to FBAR filing, business entities are now facing more scrutiny than ever before. If you are worried about your company’s assets, be sure to reach out to our Maryland tax attorneys for assistance. With decades of experience and a comprehensive set of specialties, our legal team will be able to help you minimize your legal liabilities. Contact us today for a consultation.