Monday, May 27, 2013

Two Brothers, An Offshore Trust And An Ignored CPA



Here is the cast of characters for today’s discussion:

Brian             orthopedic surgeon and idiot tax savant
Mark             Brian’s brother and idiot business manager
Michael         long-suffering CPA
Lynn              the “other” CPA

All right, maybe I am showing some bias.

Let us continue.

The two brothers attend a seminar about using domestic and offshore trusts to delay taxes until the monies were brought back into the United States. In the meanwhile, one could tap into the money by using a credit card.

Sure. Sounds legit.

The brothers return and are excited about this new tax technique. They ask Michael’s advice. Michael tells them that the seminar promoter was “a person to avoid” and to consult an independent tax attorney. 

Brian blew off Michael. Brian signed up for the offshore trust. He may have received a toaster with his new account.

Michael – who does the accounting - sees a $15,000 check to the promoter. He writes Brian:

I am writing to you because I am concerned for you and the risks you may inadvertently be taking.
It seems to me that the promoters are relying on an elaborate chain of complex entities to conceal taxable income. I am especially suspicious when I learned that they will provide you with a VISA card to access the money.
I am asking that you consider the worst case scenario in which the IRS takes the position that you are committing tax evasion. They have the power to assess huge penalties and interest, to prosecute you, to ruin your career, and seize your property. Is the risk worth it?”

Michael talks with Mark. He believes that the brothers have finally listened to his advice.

Meanwhile, the brothers did not listen to anything. They set up a series of interlocking companies and hired Lynn to prepare taxes for those companies. Lynn is associated with the promoters of this tax scheme.

  • In year one the brothers transfer $107,388 offshore and deduct it as management fees 
  • In year two they transfer and deduct $199,000 
  • In year three they transfer and deduct $175,000

The IRS swoops in on the trust promoters. They take Lynn’s computer. Lynn calls Mark, explains all that, and recommends that they see a tax attorney. Maybe they should amend the tax returns.  Mark, after his many minutes of tax education, training and experience, told Lynn that he was not amending anything.

It gets better.

The promoter contacts the brothers and says that they have a NEW AND IMPROVED program that will be bulletproof against the IRS. The brothers sign on immediately.

The brothers receive their sign soon thereafter. 


  • In year four they transfer and deduct $650,000

Michael is preparing this tax return. He calls Mark and asks about the “management fee.” Michael has Mark write him a letter that all was on the up-and-up.

  • In year five they transfer and deduct $460,000

Michael is not preparing this tax return. He has had enough, and he has a career to protect. He wants a letter from an attorney that the transactions are above board.

Mark fires Michael.

And, in another surprise, daytime was followed by darkness.

A year later, Michael (the hero of our story) sends the brothers a press release about the “dirty dozen tax scams.” Sure enough, theirs is on the list. There is still time to send back the sign.

  • In year six they transfer and deduct $180,000

In addition, Brian taps the offshore account for $270,000 for the purchase of a new home.

A couple of years later Michael receives a subpoena from the IRS for records pertaining to Brian and his company. This is when all that communication back-and-forth with Mark and Brian may have taken its toll, as Brian was virtually giving the IRS a roadmap.

The brothers, perhaps whiffing that they may have missed a key lecture in their vast tax education, decided to amend Brian's personal returns, adding most of the so-called management fees back to his income. Brian sends a big check to the government.

This case goes to Court. This is not a regular tax case. No sir, this is a fraud case. Someone is going to jail.

There was an eleven-day trial. The brothers were found guilty on all counts.

There was something interesting in here during interrogatories. The IRS never discussed the amended returns when they were presenting their fraud case. The brothers objected, but the Court sustained the government. The brothers introduced the amended returns when it was their turn.

The brothers had a point. The government was not out ALL the money, because Brian had paid a chunk of it with the amended returns. Why then did the Court sustain the government? Here is the Court:

As an initial matter, we note that the amended returns were submitted years after the false returns had been filed and months after[Michael] warned [the brothers] that their records had been subpoenaed. We have previously said that ‘there is no doubt that self-serving exculpatory acts performed substantially after a defendant’s wrongdoing is discovered are of minimal probative value as to his state of mind at the time of the alleged crime.”

Wow. There were no brownie points with this Court for doing the right thing.

By the way, Brian got 22 months at Club Fed and his brother got 14 .

But they got to keep the sign.


No comments:

Post a Comment