Taxable Talk

A chiropractor put his business in a trust. He admits he had no idea of how trusts work and he never performed the duties of a trustee. Given that I'm writing about this, I'm sure you know where this is headed.

Trouble.

And then he started selling his trusts to others. Givers gain, right? He even filed a lien against a client's assets to frustrate the IRS.

The IRS wasn't happy. Given that the government lost about $1 million in tax revenue ($248,000 directly related to the trust scheme), such a reaction was to be expected.

Our chiropractor decided to plead guilty to conspiring to defraud the IRS. He'll spend twenty months in Club Fed thinking about his wayward ways, and also pay a $10,000 fine.

The chiropractor was a licensee of Advanta Strategies and World Contractual Services. The proprietor of Advanta was been sentenced to 54 months in prison last year.

Our usual advice on trusts holds: If it sounds too good to be true, it probably is.

News Story: Salt Lake Tribune

The Tax Court today looked at a case where the government went after a couple who had been convicted of insurance fraud. The problems began in 1998, when the fraud was committed. There was $272,963 in unreported income. As you may remember, illegal income is just as taxable in the U.S. as legal income. However, the Chens, the couple in question, argue that the statute of limitations expired; the spouse argues for innocent spouse relief; and they question the amount of income.

There's a major difficulty when you argue that the statute of limitations prevents prosecution. Under section 6663(a), there must be proof of the fraud, and that the underpayment of tax is due to fraud. Given that the Chens pleaded guilty to fraud, the first hurdle is easily overcome. And the second hurdle is mostly overcome by the plea agreement, where the couple admits "act[ing] with a specific intent to commit fraud." The court also notes the numerous other indications of fraud from the criminal case, including a false insurance claim, concealing information from their tax preparer, and contradictory claims during their testimony. And there's no statute of limitations when a tax underpayment is caused by fraud.

Mrs. Chen doesn't succeed in her innocent spouse claim. She had, in her plea bargain, admitted that she "acted with a specific intent to commit fraud."

So the Chens will need to find another $272,963. For once you say you committed fraud, you have to live with the result.

Tax Court Case: Chen v. Commissioner, T.C. Memo 2006-160