The Internal Revenue Service is cracking down on illegal foreign and domestic trusts, sending record numbers of promoters and their clients to prison for tax evasion, the Associated Press reported Oct. 13.
At least 103 people have been convicted of fraud and other charges related to the illegal trusts, Mark Matthews, chief of the IRS’ criminal investigations division, told AP.
The agency has 130 ongoing investigations, he said.
Legal trusts are created to separate an owner from responsibility and control of his or her assets, AP said.
Trusts generally are run by independent trustees and are used for estate planning, charitable purposes or to hold assets for a beneficiary such as a minor child.
Trusts pay taxes on their income but may not deduct distributions to qualified beneficiaries.
People who use illegal trusts take advantage of rules that allow distribution deductions to claim fake expenses such as living costs, lodging, vacations and food, AP said.
By using networks of “vertically layered” trusts, they take illegal deductions at each layer, in the process reducing their reportable income.
One of five layers used in these schemes typically involves a “charitable trust.”
Such trusts are created to pay for personal, educational and recreational costs, which then are deducted as “charitable” deductions on tax returns.
Any income that’s left after two or more of these layers is returned to the taxpayer.
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