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IRS and DOJ are Targeting Abusive Trusts

Offshore Account Update

Posted on October 17, 2023 |

The Internal Revenue Service (IRS) and the U.S. Department of Justice (DOJ) are targeting taxpayers and promoters for the use of abusive trusts. The IRS identified various types of abusive trust schemes on its 2023 “Dirty Dozen” list, and the DOJ recently announced the indictments of two individuals who are charged with “instruct[ing]clients to assign their income to a series of sham trusts to make it appear as if the income was no longer owned or controlled by the client.”

Abusive trusts have long been on the IRS’ radar. They are a perennial inclusion on the “Dirty Dozen” list, and the IRS has identified several types of abusive trust schemes that it considers red flags for tax evasion and tax fraud. Now, with the DOJ pressing charges following an investigation conducted by IRS Criminal Investigation (IRS CI), it appears likely that additional charges targeting both taxpayers and promoters will be forthcoming. Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains.

What Do the IRS and DOJ Consider an “Abusive Trust”?

Trusts are not inherently abusive. Trusts serve several legitimate tax and estate planning purposes, and numerous taxpayers have trusts that they use to lawfully mitigate their federal income, estate and gift tax liability.

However, due to widespread abuse, the IRS now scrutinizes complex trust arrangements used for tax and estate planning purposes. The IRS also pays particular attention to cases in which multiple taxpayers use similar trust arrangements—which is often indicative of fraudulent promotion schemes. Crucially, even if taxpayers rely on promoters’ representations in good faith (and even if promoters face criminal prosecution), taxpayers ultimately remain responsible for the contents of their returns.

What does the IRS consider to be an “abusive trust,” and when will the DOJ pursue charges? The IRS has published an Abusive Trust Tax Evasion Schemes Toolkit that provides an in-depth look at the agency’s perspective on the issue. The DOJ’s recent indictments provide key insights as well. The IRS’ Toolkit provides an overview of what it considers to be abusive domestic and foreign trust schemes and notes that the substance of a tax shelter, not its form, ultimately determines taxpayers’ liability. In its press release, the DOJ notes that the two defendants are facing charges for encouraging theirtel:+1-617-692-2989 clients to take steps including:

  • Opening bank accounts and credit cards in the names of their sham trusts to pay personal expenses;
  • Transferring real estate and other assets to their sham trusts to avoid capital gains tax at the time of sale; and,
  • Filing false tax returns that underreported their personal tax liability due to the fraudulent use of their sham trusts.

Even if the use of an abusive trust arrangement does not warrant federal criminal charges, it can still expose the taxpayer to liability for back taxes, interest and penalties. With this in mind, taxpayers in Massachusetts who have concerns related to their use of trusts for tax purposes should consult with an experienced Boston tax lawyer promptly.

Request a Confidential Consultation with Boston Tax Lawyer Kevin E. Thorn

If you are facing IRS or DOJ scrutiny, or if you have concerns about facing scrutiny related to your use of a tax planning trust, we encourage you to contact us for more information. To request a confidential consultation with Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 617-692-2989 or inquire online today.

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