North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

A self-directed IRA is an IRA held by a custodian that allows investments in a broader class of assets than allowed by most IRA custodians, such as real estate, promissory notes and private placement securities. Because they normally include such alternative assets, the risk and rewards of self-directed IRAs may be greater than those of traditional IRAs.

Self-directed IRAs are becoming increasingly common, and while there are many legitimate investments available, there is more risk of investors becoming defrauded due to the nature of the assets involved.

To help raise public awareness of how to avoid fraud, the Retirement Industry Trust Association and the North American Securities Administrators Association are offering a free webinar on July 18 at 2:00 p.m. Eastern.  Click here to register.

Among the topics to be discussed are:

• What are self-directed IRA accounts and why are they useful?
• What are the warning signs of investment fraud in self-directed IRAs?
• What should investors do if they suspect fraudulent activity?       
• How do securities regulators help protect investors who use self-directed IRA accounts?

Owners of self-directed IRAs should also be careful when purchasing and operating rental real estate within the IRA, as violations of a "prohibited transaction" could trigger tax penalties.

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Yesterday I blogged about North Carolina's controversial Amendment One, which ended up passing by a large margin.  I also have some thoughts about another matter in the headlines - the John Edwards trial.  I have not been following the case closely, but I do know that central to the case is the money received in 2007 from wealthy donors Fred Baron and Bunny Mellon, Edward's knowledge of the donations, and whether they constituted campaign funds or simply gifts.  Edwards former speechwriter Wendy Button testified that Edwards told her that the money was legal because the donors had paid gift taxes. 

However, the matter of the gift taxes is not so simple.  In 2007, the federal gift tax exemption was $2 million, meaning the Baron and Mellon could have each given someone that amount without paying any tax, provided they had not previously used up the exemption.  In any event, a federal gift tax return would be required to report the gift to the donees since it exceeded $12,000 per person.  But exactly who were the donees?  John Edwards?  He certainly benefited from the gifts, since they helped hide Hunter's pregnancy, even if he didn't receive anything himself.  Rielle Hunter was certainly a donee, as she received. at least, free rent and a BMW.  Andrew and Cheri Young?  They apparently kept most of the money to build themselves a house.

So, if Baron and Mellon filed gift tax returns as required, whom did they list as donees?  Somehow I doubt the correct names and amount were on the returns.  Were the returns later amended to correct the information?

And what about subsequent gifts of the same money?  Did Edwards effectively make a gift to Hunter?  To the Youngs?  Was there a gift from the Youngs to Hunter?  Any such gifts in excess of $12,000 would also required to be reported, and the estate tax exemption of the donors would be reduced by the amount of the gifts.. 

Edwards and anyone else considered to be a North Carolina resident would also be required to report the gift to the North Carolina Department of Revenue, as North Carolina still had a gift tax in 2007 and 2008.  In fact, North Carolina's lifetime exemption was just $100,000, and that only applied to close relatives.  That means North Carolina gift tax would have been due.

Only a tax lawyer would think about such things - but, the tax laws are laws too, and they should be enforced.  I would like to see how this would all unravel if the IRS and NCDOR conducted audits of those involved.

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Promoters of tax avoidance scams are not only acting illegally, but they can put unknowing participants at risk of penalties and even jail time.  The old saying "if it seems to good to be true, it probably is" certainly applies here, but plenty of celebrities have fallen prey to such schemes, including Wesley Snipes.

There are plenty of legitimate tax reduction techniques available, but when someone tells you he can help you avoid taxes altogether, I recommend running for the hills.  You can also report the scam and its promoters to the IRS.  Think of it this way - the less tax cheats out there, the more money our government gets, and theoretically, anyway, the less likely it is to raise taxes on the rest of us.

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The IRS has released its annual list of tax scams for taxpayers to watch out for - review this list to help educate and protect yourself.  Believe it or not, the IRS wants to help!

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Due to Hurricane Fran, the IRS has extended the deadline for the Offshore Voluntary Disclosure Initiative for foreign accounts to September 9, 2011.  U.S. taxpayers with foreign accounts totaling more than $10,000 at any time during the year must report the accounts to the IRS or face substantial penalties and criminal charges.  Voluntary disclosure and payment can avoid criminal charges. Click here for more information.

For certain professionals, failing to report can end also one's career. An attorney here in North Carolina was recently disbarred for failure to report an offshore account.

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IR-2011-39:

Video: Dirty Dozen: English  |  Spanish  |  ASL 

WASHINGTON –– Hiding income in offshore accounts, identity theft, return preparer fraud, and filing false or misleading tax forms top the annual list of “dirty dozen” tax scams in 2011, the Internal Revenue Service announced today.

“The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”

The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties.

Following is the Dirty Dozen for 2011:

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From IR-2011-23

WASHINGTON — The Internal Revenue Service today released the 2011 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 84-page document, The Truth About Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

The 2011 version of the IRS document includes numerous recently decided cases that continue to demonstrate that frivolous positions have no legitimacy.

Frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.

In addition, the document highlights cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes, and the imposition of criminal and civil penalties on taxpayers who claimed they were not citizens of the United States for federal income tax purposes.

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From IR-2010-32:

WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.

“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”

Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.

The IRS urges taxpayers to avoid these common schemes:

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Have you ever heard a friend, neighbor, or colleague state that they had found a way to get around paying income taxes, or that certain taxes weren't really legal?  Don't believe them - many people, including several wealthy actors, have gotten into trouble with the IRS that way.

The IRS has a comprehensive analysis of frivolous tax arguments on its website.

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From IR-2009-84:

WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.  

Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.

IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.

The IRS also announced that there will be no further extensions.

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Facing negative publicity over unpaid taxes, Tom Daschle withdrew his name from consideration as Secretary of Health and Human Services.  Nancy Killefer, Obama's pick for Chief Performance Officer, also withdrew her nomination, citing her unpaid payroll taxes for a household employee.

Too bad Timothy Geithner (Secretary of the Treasury) didn't do the same.  Now we have a tax cheat in charge of the IRS.  As an honest taxpayer and tax lawyer,  I am personally and professionally outraged!

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First it was Timothy Geithner for Secretary of the Treasury, and now it turns out Tom Daschle, nominated for Secretary of the Department of Health and Human, also failed to report income and pay taxes.  Then there's Charles Rangel.  What's up with these people?  Mistake, error, omission - I call it tax fraud.

Call me idealistic, but I don't believe we should have tax cheaters running our country, especially the IRS and the Ways and Means Committee!

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The IRS recently published a notice naming four new frivolous income tax claims:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

Needless to say, do not take any of these positions on your return!

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I previously blogged about former U.S. Attorney, state judge and North Carolina Republican Chairman Samuel T. Currin and attorney Rick Graves being indicated for tax fraud.  Mr. Graves was acquitted by unanimous jury verdict, but Mr. Currin plead guilty to the tax fraud charges as well as securities fraud.  Earlier this week he was sentenced to 70 months in federal prison.

Mr. Currin conspired to launder almost $1.5 million through his law firm's trust account, and failed to disclose an offshore debit card account. He also manipulated stock prices of several companies by disseminating false information, and then profited from the increased stock prices that resulted.

Chapel Hill's own John McCormick was also recently arrested in Arizona.  The former attorney, who was disbarred after his disappearance, is accused of stealing more than $1 million of his clients' money.

Finally,  former Durham D.A. Mike Nifong reported to the Durham jail to serve his one day sentence for contempt of court.

We lawyers have a hard enough time with our public image even in the absence of newsworthy cases like these.  Please rest assured that the vast majority of attorneys are law abiding, honest, and loyal to our clients.  I personally place the utmost importance on the trust of my clients, and do everything I can to maintain that trust at the highest level.  Beyond the obvious specialization in trust law, that is the reason I named my firm TrustCounsel, P.A.

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In an October 2006 posting, I reported that North Carolina attorney Rick Graves was indicated for tax fraud.  I am pleased to report that last week he was found "not guilty" by unanimous jury verdict, and acquitted of both charges of federal tax fraud.

To view Mr. Graves' Press Release, click "Continue Reading."

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Newsday reported today that actor Wesley Snipes has been indicted for federal income tax fraud for claiming $12 million in refunds for 1997 and 1997.  Today is also the 75th anniversary of the date that mobster Al Capone was sentenced to 11 years in prison for income tax evasion.  He served 8 years.

While I don't see a lot of outright fraud by clients coming into my office, I have had many clients who have neglected to file their tax returns, sometimes for many years.  One even had the returns prepared by a CPA, with envelopes ready for mailing, and never bothered to sign the returns, write a check and stick them in the mail.  Penalties for failure for file returns and failure to timely pay taxes are 5% and .5% respectively of the tax due per month for up to 5 months, so the penalties can easily 25% of the tax!  The interest adds up quickly also.

So, not only is it important not to cheat on your taxes, but also to make sure you file and pay on time!

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Two NC attorneys face jail for helping clients dodge taxes.  While they can be useful in asset protection under the right circumstances, Offshore Trusts cannot legally avoid taxes for U.S. citizens!

Posted by Juan Antunez in his Florida Probate Litigation Blog:

Offshore trust scheme leads to former U.S. Attorney pleading guilty to tax fraud

In Florida it is almost inevitable that attorneys -- and especially trusts and estates attorneys -- will end up counseling clients who have existing relationships with off-shore trust companies or are considering some sort of arrangement involving an off-shore trust. Like any industry, there are good and bad actors doing business out there. Perhaps unfairly, my inclination is to approach the entire industry with more than my usual degree of skepticism (which says a lot!).

Recent events underscore why Florida attorneys would be wise to counsel caution when evaluating tax savings ideas proposed to clients by off-shore trust operators. In April of 2006 the heads of a Bahamian corporation operating under the name "Sterling Trust" were jailed in North Carolina after a sting operation mounted by undercover agents of the IRS in connection with an alleged tax fraud conspiracy. The trust angle was described in Executives With Bahamas Ties Jailed as follows:

The indictment, signed by Assistant U.S. Attorney Matthew Martens, says Graves, the Woltzes and Currin "would and did concoct foreign ‘dual trust’ arrangements so that wealthy United States citizens could evade federal income tax."

According to the indictment, the IRS undercover agents solicited advice from Graves on evading U.S. taxes on the fictitious sale of "gaming rights" for $10 million. Graves allegedly recommended a scheme known as a "dual trust structure" by which Sterling Trust would set up two trusts that would facilitate the evasion of the taxes.

Attorneys can get personally stung by this type of fraud when they step over the line from simply acting as counselors to affirmatively facilitating their cleints' involvement in this type of scheme. As reported in Former U.S. Attorney to Plead Guilty in Tax Fraud Scheme, a distinguished former U.S. Attorney is facing up to 43 years! in prison because of his involvement . . . in addition to the personal catastrophe this must be for his family. Here are a few excerpts from the linked-to article:

A former U.S. Attorney, state judge and state Republican chairman has agreed to plead guilty to charges related to a tax fraud conspiracy, federal prosecutors in Raleigh, N.C., said Wednesday.

Samuel T. Currin will plead guilty to conspiring to launder $1.45 million through his law firm's client trust account and to lying on his taxes by failing to report an offshore debit card account, prosecutors said. Three others also have been charged.

He could be sentenced to as many as 43 years in prison.

Tax attorney Ricky Graves; Howell Way Woltz, president of Sterling Trust in the Bahamas; and his wife, Vernice Woltz, a director of Sterling Trust, are also charged.


Lesson learned: Caveat Emptor!

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