After IRS Warnings, DOJ Announces Indictments for Abusive Trusts

Earlier this year, the Internal Revenue Service (IRS) included various forms of abusive trust schemes on its 2023 “Dirty Dozen” list, and it followed this up with the publication of an extensive Abusive Trust Tax Evasion Schemes Toolkit outlining what it considers to be an abusive trust arrangement for federal tax compliance purposes. Now, following an investigation conducted by IRS Criminal Investigation (IRS CI), the U.S. Department of Justice (DOJ) has announced charges against two individuals who are accused of promoting abusive trust schemes that “resulted in tens of millions of dollars in federal income taxes not being paid to the IRS.”

In light of these developments, it is likely that the IRS and DOJ will continue to target abusive trusts throughout the remainder of 2023 and into 2024. With this in mind, in this article, Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains what promoters and taxpayers need to know.

The Hallmarks of an Abusive Trust Arrangement (According to the IRS)

In its Toolkit, the IRS identifies several factors that it considers to be hallmarks of an abusive trust arrangement. These factors include:

• Reduction or elimination of personal income subject to tax through transfers to a trust
• Reduction or elimination of self-employment, estate or gift taxes 
• Deducting personal expenses paid by a trust
• Depreciation deductions for personal expenses or assets paid by a trust
• Claiming a stepped-up basis for property transferred to a trust

Crucially, while these factors may be indicative of tax evasion or tax fraud, this isn’t necessarily the case. Taxpayers can use trusts for tax planning, and the effective use of trusts can often help taxpayers reduce their federal income, estate and gift tax liability substantially. Nonetheless, due to widespread abuse, the IRS (and the DOJ) have made clear that they will be closely scrutinizing taxpayers’ use of trusts going forward—particularly when multiple taxpayers employ similar schemes formulated by the same promoter.

Potential Charges (and Penalties) for Promoting or Using an Abusive Trust Scheme

When the promotion or use of a trust for tax avoidance purposes leads to criminal allegations, individuals targeted by the DOJ can face a variety of federal charges. For example, in the pending case discussed above, the DOJ is pursuing charges for conspiracy to defraud the United States, aiding and assisting in the preparation of false tax returns, and tax evasion. Each of these charges carries substantial fines and the potential for a maximum of three to five years of federal imprisonment.

What if you unknowingly fell for a fraudulent trust promotion scheme? In this scenario, you shouldn’t be at risk for criminal prosecution. However, even if you are able to avoid an indictment, you could still face substantial liability for back taxes, interest and penalties. As a result, you need to handle your situation very carefully, and you should speak with a Washington D.C. tax attorney as soon as possible.

Request a Confidential Consultation with Washington D.C. Tax Attorney Kevin E. Thorn

If you have questions or concerns about facing scrutiny from the IRS or DOJ related to a possible abusive trust scheme, we encourage you to contact us promptly. To request a confidential consultation with Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033 or contact us confidentially online today.