IRS Targets Income Tax Evasion Through Trusts

IRS Targets Income Tax Evasion Through Trusts

IRS Cracks Down on Income Tax Evasion Through Trusts

If something seems too good to be true, it definitely is. Unfortunately, many people still attempt tax evasion through trusts, funneling their money through bogus entities and foreign corporations—and it isn’t pretty when the government catches up with them. The actual truth? Ignoring your wealth planning attorney’s advice has a better chance of landing you in jail than avoiding federal income tax.

Let’s be clear about your obligation to pay taxes. The law is that no one is responsible for paying any more in taxes than they actually owe. If you take legal steps to reduce your tax burden in the bounds of the tax code – Congratulations! You’re good.

But, if you evade taxes, that’s a crime.

TABLE OF CONTENTS

What Is an Abusive Tax Shelter?

An abusive tax shelter is a financial strategy designed to exploit loopholes in tax laws to reduce or avoid federal income tax. Unlike legitimate tax planning strategies, these shelters lack a legitimate business purpose and have little to no economic substance beyond tax benefits.

Tax evasion through trusts can happen in several ways, including:

  • Artificially inflating deductions or credits
  • Deducting an owner’s residence or personal expenses
  • Misrepresenting the nature of transactions
  • Hiding income behind complex business structures or offshore entities
  • Structuring transactions so they are difficult for tax authorities to detect.

IRS Busts Abusive Trust Tax Evasion Schemes

As you might imagine, The Internal Revenue Service (IRS) and State tax authorities are keen to shut down the operators of abusive-trust tax shelters. Two recent cases should serve as a warning to anyone considering purchasing a similar tax elimination scheme—no matter how much they promise to save you.

Dentist Bites Off More Than He Can Chew

In August 2024, Colorado dentist Ryan Ulibarri was charged with six counts of tax evasion by a federal grand jury for using an illegal tax shelter. Ulibarri allegedly hid over $3.5 million of taxable income over the period between 2017-2022, an underpayment of more than $1 million in tax. 

According to the indictment, Ulibarri allegedly purchased the tax shelter in 2016 for $50,000. From 2017 through 2022, Ulibarri allegedly used the scheme to conceal income he earned from his practice, Ulibarri Family Dentistry, from the IRS.

The tax shelter promoter allegedly told Ulibarri he could eliminate his taxable income by routing it through a chain of three trusts and a charity. Since each entity was the beneficiary of the one above it, the three trusts took deductions for “expenses” to the below entity, reducing its own taxable income to zero.

The indictment also alleges the promoter gave Ulibarri two versions of the trusts’ documents—a short version to provide to banks and fiduciaries and a longer version to be kept confidential. Ulibarri allegedly used funds from the trusts and his charitable foundation for personal expenses, such as his mortgage, credit card bills, and season tickets to a baseball team. If convicted, Ulibarri faces up to five years in prison for each tax evasion charge, plus the full amount of unpaid taxes with interest and penalties.

The worst part of this situation is that Ulibarri is both a victim of the promoter’s scheme and a potential tax evader in his own right. Double whammy – Yikes!

Preparer Pleads Guilty to Tax Evasion Through Trusts

Kent Ellsworth of Arizona pleaded guilty in March 2024 to two counts of preparing false tax returns for individuals using an abusive trust tax shelter. Ellsworth prepared and filed over 500 false tax returns for about 60 clients nationwide between 2017 and 2023, underreporting their income and tax obligations. 

People who bought the tax shelter were told to give almost all of their income to fake trusts and a “private family foundation,” making it appear as if the money wasn’t theirs anymore. Of course, these fake trusts and foundations were just bank accounts where the clients kept full control of their funds.

Ellsworth was taught how to fill out fraudulent tax forms, attesting the money belonged to the (fake) trust, not the person. Then, he reduced the trust’s tax by deducting expenses like the clients’ personal bills and living expenses. Ellsworth’s actions led to more than $60 million in income being unlawfully withheld, costing the IRS about $17 million in taxes.

Open Secret?

If you hear about something that you’re not sure about, especially around the dessert table during the holidays, here’s the link to the IRS’ Dirty Dozen list. The Service does us all a favor by telling us the top types of hare-brained schemes that are being cooked up by some (reasonably) smart people. 

Tax Evasion Through Trusts Is Illegal. Tax Planning Isn’t.

Throughout stories like these, people always try to warn the taxpayers to step back and think. Don’t try to take the easy way—it does not pay and can cost you dearly. Instead, speak to an experienced asset protection attorney about your options. Email Yolofsky Law at [email protected] today or schedule a 15-minute call to get started.