IRS and DOJ Target Taxpayers and Promoters for Abusive Trust Schemes

The Internal Revenue Service (IRS) and the U.S. Department of Justice (DOJ) are targeting taxpayers and promoters for abusive trust schemes. While noting that promoters often push these schemes on wealthy and unsuspecting taxpayers, the IRS makes clear that taxpayers remain personally responsible for their returns, and it is working with the DOJ to prosecute all individuals who are involved in using abusive trust schemes to evade federal tax liability. As a result, many taxpayers and promoters are finding themselves in need of an experienced New Jersey tax attorney.

As a recent example, on September 25, 2023, the DOJ announced charges against two individuals who are accused of both promoting and using abusive trust schemes. According to a DOJ press release, the individuals both used an abusive trust tax shelter to conceal their income from the IRS and encouraged clients to use abusive trust arrangements to evade federal taxes. These individuals are now facing multiple federal charges that collectively carry the possibility of more than a decade behind bars.

What Is an “Abusive Trust Scheme”?

This raises an important question: What is an “abusive trust scheme”? Trusts are valid tax and estate planning tools, and many people lawfully use trust arrangements to minimize their federal income, estate and gift tax liability.

The IRS defines an abusive trust scheme as follows:

“Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. Although these schemes give the appearance of separating responsibility and control from the benefits of ownership, as would be the case with legitimate trusts, the taxpayer in fact controls them.”

As the IRS goes on to explain, abusive trust schemes often involve the layering of multiple trusts, “with each trust distributing income to the next layer.” This results in taxpayers claiming “inflated or nonexistent deductions” that purportedly reduce (or eliminate) their tax liability.

Abusive trust schemes can take many forms, and they can involve domestic trusts, foreign trusts, or both. While promoters often tout the tax-saving benefits of these schemes, the IRS advises that these schemes “will not produce the tax benefits advertised” and warns that it is “actively examining these types of trust arrangements.”

Are You At Risk for IRS or DOJ Scrutiny in New Jersey?

If you use or promote trusts for tax planning purposes, are you at risk for IRS or DOJ scrutiny? The answer to this question depends on your individual circumstances. Crucially, even if you aren’t at risk for criminal tax charges as a taxpayer, you could still be at risk for substantial civil liability. As a result, you need to ensure that you are making informed decisions, and if you have concerns, you should speak with an attorney promptly.

Request a Confidential Consultation with New Jersey Tax Attorney Kevin E. Thorn

Do you have concerns about facing IRS or DOJ scrutiny related to an alleged abusive trust scheme? If so, we encourage you to get in touch. To request a confidential consultation with New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 201-842-7696 or inquire online today.