Joseph Shanahan of Everett, Washington was sentenced to three years prison for his role in promoting "pure equity trusts", an abusive type of trust that the IRS says cost the Treasury $8.5 million. 

Shanahan actually got off pretty light.  His co-hort, David Stephenson, was sentenced to 8 years prison, and ordered to pay $8.5 million in restitution.  I wonder if they think it was worth it?  I wonder how their clients are feeling right now?

Two Nevada-based companies have been barred from selling living trusts and estate plans in the state of Ohio. The "Cleveland Plain-Dealer" says "Asset Preservation Group" and "The Estate Plan of Nevada" were fined by the Ohio Supreme Court. A third company, Cleveland-based "Sharp Estate Services," was ordered to pay 1-point-2-million- dollars for illegally practicing law. The high court found the three companies guilty of sending non-attorneys into Ohio to sell "living trusts" and other estate plans. The victims will now have to hire their own attorneys to determine if their trusts and estate plans are legal. Officials with the Nevada firms have not commented on the court ruling.

Link: Wired News: ID Theft: What You Need to Know. 

This article answers the following important questions:

1.  A thief stole my credit card number.  Am I a victim of identy theft?

2.  How do thieves get information to use my credit card or steal my identity?

3.  How will I know if my identity has been stolen?

4.  If someone charges my card will I have to pay for the items they buy?

5.  If someone steals my identity am I responsible for charges thay make on new cards in my name or other damages they cause?

6.  What should I do if my wallet or purse is lost or stolen?

7.   What can I do to prevent myself from becoming a victim?

Wayne Bentson, from Payson, Arizona, was sentenced to 4 years in prison and ordered to pay over  $1 million in fines for tax fraud.  Bentson evidently used foreign accounts in the Cayman Islands and claimed that US personal income tax laws only apply to residents of the US Virgin Islands, Guam and Puerto Rico - a common claim made by tax protestors.

Nothing about this case is that uncommon.  However, I thought it interesting to make note of the comments of prosecutors of this case, who said, "Those who participate in or encourage taxpayers to evade the payment of income taxes are engaged in a criminal activity and will be prosecuted."

The prosecutor went on to offer this advice:  "Taxpayers should be wary of anyone claiming to be an expert on how to hide income from the IRS."

Christopher Hansen, a resident of San Diego, has been selling a "Citizenship Administrative Program", which he claims will allow customers to remove themselves from the U.S. tax system by repudiating their citizenship in favor of "American National Citizenship".  The cost for this scam is a mere $2,000 for an individual or $2,700 for a couple.  For this, Hansen apparently prepares and files false tax returns or tells them not to file a return at all.

The IRS has obtained a permanent injunction against Mr. Hansen, and is currently investigating not only Hansen's operations, but also all of his customers.  The Court has ordered Hansen to provide the government with customer names, mailing addresses, email addresses, telephone numbers and Social Security Numbers.  I am thinking they wish they hadn't tried this.

I read where the Australian Securities and Investments Commission (ASIC) - the Aussie version of the SEC - issued a press release regarding PIPs, the ponzi-scheme scam I wrote about earlier.  According to this securities regulator, the ASIC has already started to investigate the PIPs program and any promoters working in Australia.

Mr. Greg Tanzer, ASIC Executive Director of Consumer Protection is quoted as saying, "Not surprisingly, PIPs has already received several nominations for ASIC's 2005 'Pie-in-the-Sky' award."

From reports I have recieved from individuals who follow this scam, PIPs quit making payments last December, and have blamed a series banking errors, computer glitches, and other straw-man excuses to string along the faithful and keep them on the hook.  But the cracks are starting to become painfully obvious.  I personally know of one person who is waiting for her investment account totaling about $9,000 to be paid to her, even though the request was made months ago.

Every year, the IRS produces a "Dirty Dozen" List of tax schemes that it warns individuals and businesses to avoid.  The timing of the release of this list is always right in the heart of tax season, which I am confident is not mere coincidence. The 2005 list was released today with several familiar warnings, and a couple of new scams. Here is the rundown according to me (check out the IRS site if you want the official explanations):

1. Trust Scams.  How many years does this appear in the Dirty Dozen list before it gets its jersey retired?  The reason trust abuse is so prevalent is because it purports to give an individual control over income and assets without - allegedly - having any tax responsibilities.  Case law that refutes traditional trust scam strategies have been on the books for many years, and the IRS has been cracking down hard on abusers.  Remember, just because the trust promoter and the trust documents may claim to grant special legal powers or some mysterious status that is out of the reach of the tax collector doesn't mean the IRS and the Tax Court agree.

2. Frivolous Arguments.  friv.o.lous (frv-ls) adj. 1.Unworthy of serious attention; trivial: a frivolous novel. 2. Inappropriately silly: a frivolous purchase.  I have never understood what people think they are going to accomplish by taking a "trivial" or "silly" argument to the Tax Court.  I've never been before the Tax Court, and hope never to have that opportunity, but I picture them as a fairly serious bunch of people.  Do they really think they can show up with the argument that the personal income tax was never properly ratified or some other nonsense?  If that were true, even I have enough faith in the body of our nation's lawyers to think that somebody would have noticed it before now.

3. Return Preparer Fraud.  A simple scan of the press releases issued by the US Department of Justice over the years shows that there are a lot of fly-by-night operators who try to scam both individuals and the IRS by hanging a shingle, processing tax returns with huge tax refunds, and splitting the refunds with the clients.  The clients may foolishly believe that if a tax preparer has signed off on the return, then it must be correct.  But in the real world, if it is your return, you are responsible.

4. Credit Counseling Agencies.  We've all heard or seen the ads.  "Non profit" companies, claiming to be working for innocent consumers who are over burdened by debt, work to negotiate with all your creditors to reduce your payments and clear up your credit.  Maybe somewhere there are legitimate companies who do that, but the IRS recognizes that most of them are scams that just soak desperate debtors with needless fees.  These supposedly non profit companies throw a lot of cash into the pockets of their officers and organizers, which is an abuse of the federal non profit designation.

5. "Claim of Right" Doctrine.  I don't know how it got this name, but it probably comes from IRS regulations.  In a nutshell, this scam would have taxpayers take a deduction for the entire amount of their income, with the claim that it was all a write-off for the cost of producing the income in the first place.  I've seen my dog chase his tail just the same way, and he can never catch it, either.

6. "No Gain" Deduction.  This is a variation on the "Claim of Right" theme, just using different tax schedules to create the deductions against all the income, resulting in "no gain", and thus no tax.

7. Corporation Sole.   This scam is the inevitable by-product of the start-your-own-church-and-take-religious-deductions scam that started 20 years ago in Southern California.   By forming a corporation sole - which has specific use for religious organizations to hold assets - people try to claim that their income is tax exempt.

8. Identity Theft.  Apparently the IRS is seeing a lot of attempts by scam artists to phish personal info and Social Security numbers by posing as tax auditors or financial institutions providing personal tax information. 

9. Abuse of Charitable Organizations.  Don't use a non profit company to hide personal assets or income.  No kidding.

10. Offshore Transactions.  Another Hall of Fame entry on the Dirty Dozen list.

11. Zero Return Scam.  This one is kind of funny to me.  Evidently just by putting all zeros on your tax return and writing in Latin on the bottom of it, people thought they could avoid taxes.   Why didn't I think of that?

12. Employment Tax Evasion.  Some people believe you don't have to withhold employment taxes.  I remember getting an angry letter several years ago from a reader of The Nevada Corporation Handbook, criticizing my section on how to set up payroll with the argument that payroll tax withholding wasn't required.  My response to him was essentially, "Don't be an idiot, and please don't write me again."

Last May, the federal government reported that nearly 500 federal workers, including 28 top officials in 8 different agencies had used fake degrees to get their jobs, obtain promotions or pay raises.  In a competitive hiring environment, small business - with far fewer resources than the H.R. departments of government agencies - can also be taken in by the fake sheepskins.  The availabililty of these fraudulent diplomas and certificates online may be surprising to someone who is unfamiliar with the $200 million fake diploma industry, where degrees can be purchased for under $20.  (Let's see, $200 million divided by $20 equals 10 million fake diplomas per year circulating among potential new hires!)

In response to this problem, the FTC has published a "Facts for Business" guide on how to identify these fake degrees.  According to the FTC, some of the tell-tale signs include:

1. Out of Sequence Degrees. When reviewing an applicant's education claims, be sure that the degrees earned are in a traditional progression, e.g., if an applicant claims a college degree, but shows no high school diploma or General Education Development (GED) diploma, consider it a "red flag." It is likely a sign of a diploma mill.
2. Quickie Degrees. Generally it takes time to earn a college or advanced degree. A degree earned in a very short time, or several degrees listed for the same year, are also warning signs. 
3. Degrees From Schools in Locations Different From the Applicant's Job or Home. If an applicant worked full-time while attending school, check the locations of the job and the educational institution.
4. Sound-Alike Names. If the institution has a name similar to a well-known school, but is located in a different state, check it out. It should be considered a warning sign if an applicant claims a degree from a state or country where he/she never lived.

There is also an online database available for employers to check on the accreditation of schools listed on applicant's resumes.

I bought a home almost a year ago that was owned by a real estate agent with whom I have become aquainted.  He was telling me at the time about a multi-million dollar mansion located in southern Utah that he had just picked up as a listing, and he invited my wife and I to attend an open house that was scheduled that weekend.  We showed up at the open house mostly out of curiousity,and what we saw absolutely astounded us.  In my opinion, this home was an obcenity of over-indulgence from the 3 full gourmet kitchens and the 15 car garage (in addition to a separate 7 car garage) to the $100,000+ home theatre and private jetski lake.

I inquired about the prior owner, thinking that perhaps Bill Gates or Donald Trump had built a nice little getaway or something.  No, I was told, the prior owner was a young "entrepreneur" in his early 30's who had built up a company that had made millions telemarketing several advanced-fee credit cards - which, as it turns out, weren't actually credit cards at all, but was instead a scam that preyed upon people with poor credit histories.  Evidently, the house was for sale because the FBI had seized the property as part of a federal prosection against the owner and his company.

His name was Kyle Kimoto, and his company was Assail, Inc.  You can read about the Federal Trade Commission's case against them here.   

Today, I read where the FTC has announced the final resolution of the Kimoto/Assail case with final deals against some of Kimoto's associates.  The final verdict is that the associates have agreed to a total of $82 million in suspended judgements against the associates, which will be triggered if they don't meet the conditions of the settlement, along with a $1.9 million disgorgement order.  But those figures don't include Kimoto or Assail, which had originally agreed to a $106 million suspended judgement.

Suspended, that is, until the court found out that Kimoto had been hiding an additional $3 million in profits that he socked away (with the help of an unscrupulous Las Vegas based Nevada incorporation company by the name of Nevada Corporate Services, and it's officers Richard Fritzler, Sr. and Richard Fritzler, II).  Once that was discovered, the court entered an order to enforce the original $106 million judgment.  Brilliant move, criminal.

As for Nevada Corporate Services and the Fritzlers, they avoided criminal sanctions and jail time for contempt charges by agreeing to pay a $300,000 disgorgement of profits they received for helping Kimoto try to hide his money.  In other words, Nevada Corporate Services was willing to do anything - for 10%.   

I am happy to report that Nevada Corporate Services is not a member of the Nevada Resident Agent Association (NRAA), of which I am the president.   That is probably because the NRAA is working hard to establish an ethical environment in the Nevada incorporation and resident agent industry.

I was going through my hard drive, archiving old files that I might need again and deleting files that I won't, when I came across a spreadsheet that I put together a few years ago for clients of mine that had been hooked by a foreign currency trading scam that had promised a return of 10% per month.  I used the spreadsheet to forecast the theoretical return on their $16,000 investment.  The numbers were astronomical.

The spreadsheet reminded me of the PIPs scam, a subject of an earlier post.  While the forex scam of a few years ago only promised a 10% return per month, the PIPs program promises either 2% or 3% per day, depending on the program.   If we assume a 20 day month, excluding weekends, that works out to a 40% or 60% return per month - four to six times that of the forex scam.  So, I thought I'd fire up the old spreadsheet again using the PIP numbers.

Let's say you invested $1,000 in the PIPs program at 2% per day.  Using the magic of compounding interest, after one year, the original investment would be worth $56,694 - a very nice return indeed.  (The 3% PIPs model would be worth $281,475!)  And this is supposed to be a guaranteed return with no risk!  After two years, the investment would be worth over $3.2 million at 2%, and over $79 million at 3%.  (You have to ask why anyone would ever invest in the 2% program with those kinds of returns available.)

The $1,000 turns into it's first BILLION in just over 41 months months at 2%, but it takes only 30 months to produce the first billion in the 3% program.  Ten billion?  No problem for PIPs.  Try 4 years, 2%.  The 3% program turns the trick in a mere 35 months.  Small wonder PIPs promoters believe this is a legitimate program promising achievable returns.

So I wondered - what if you left the money in for ten years?  After all, I would like to retire in ten years, and could probably dig up $1,000 to invest in such a great program if I had to.  I don't want to be greedy, so I will put my grand into the more conservative program.  What does the spreadsheet say?  HOLY COW!!  I'll make over $343,055,416,973,096,000,000!  Does that much money even exist?  I think I could live on that!

With numbers like that, the PIPs program has got to be real.  Doesn't it? 

Seriously, can there be any question that this program is a scam and a fraud?   Only a fool can believe that this is a legitimate, sustainable, safe investment.  I suppose the promoters can sue me for libel, but I believe the courts recognize that the truth is an adequate defense to such claims.

Link: Press Release.

Here is an interesting story of the conviction of several people who were selling a "Tax Magic" program that supposedly allowed businesses to take false deductions for advertising expenses through a series of international money transfers and fake loans.   The news release indicates that they had over 1,500 clients - all of whom can expect detailed audits, I am certain.

(Memo to self:  Avoid any program that even remotely alludes to providing "tax magic".)

One of the interesting sidenotes on this story is that the scammers were apparantly using a Nevada company as part of the money trail.  That bothers me, because we are trying to make Nevada a business center, and this type of activity doesn't help.  I am committed to doing everything I can  - both personally and professionally through my legislative efforts - to keep scam artists and criminals from flocking to Nevada.  I'm glad these people were caught, and hope others using Nevada entities for fraud get the message, get caught, and go somewhere else.

One of the fascinating things about what I do for a living has to do with my exposure to such a broad range of people who do so many different things.  Indeed, if it can be done, I probably have a client who is doing it.   I have learned a great deal by watching my clients engage in businesses.

The dark underbelly of this exposure is that if there is a scam out there, I probably have a client who has been caught up in it.  I remember of couple of instances as quick examples:   
       1)  Back in the early 90's one of my clients started regularly exchanging communications with somebody in Nigeria.  Many of these correspondences came by fax, which arrived in my office.   One day, a fax arrived that caught my eye because it was asking for my clients bank account information.  I called the client, gave him information on the Nigerian 419 scam, which was then far less known than it is now.  My client trusted me and I believe I saved him from be taken for tens of thousands of dollars.
        2) A couple of years ago, one of my salespeople began setting up a lot of entities for a group of private investors located in the deep south.  One of these couples came into our offices, and wanted to meet with me about planning their business.  As they explained what they were doing, I immediately recognized that they were deeply involved in a Forex trading scam, and I told them so.  Their reaction astonished me.   I was told that "if you don't  believe that what we are doing is honest, then we don't want to use your company for our services."  I had been fired for warning them to protect themselves.   Within a year, that scam fell apart, federal indictments flew, and all the investors lost their money.   I was able to assist in the federal investigation to catch scammers.

Now, there is a new scam gaining popularity, called the PIP, which stands for Pure Investor Program.  Like all scams - including the Forex trading scam mentioned earlier - many who are deeply involved in the PIP scam seem to have what I can only call a "religious conversion" to the scam.  There are many "believers" who simply cannot be told the truth.  A prudent and reasonable person will look at the "business model" of a scam to see if the model is sustainable.  This scam clearly does not meet the sustainability test.

The PIP promises a return of 2% (although there is is now a 3% version started) per day on the amount invested.  The business model of this program is completely and fatally flawed at so many levels that I can't  begin to cover it at any level of detail.  However, there is a pretty good article in the Guardian that outlines many of the inherent problems.

My opinion is that this program is a textbook Ponzi scheme.  I expect to see that this whole house of cards collapse within a year, and there will probably be a lot of criminal indictments for people who have been involved in promoting it.  If you come across this scam, my advice is to stay away.  Time will tell that I am correct on this.

Here are a few other links on this scam that may be of interest:
    Broadband Reports.com
    PIPs-scam.com
    Thinkfn.com

Derek

Link: Article: Banking site hijacked by fraudsters | New Scientist.  Suntrust Bank, based in Georgia, is the latest financial institution to be hit by web "phishing" scams.   The difference here is that the scam artists actually overlaid pages on the the bank's servers, which made this fraud very difficult to detect.

Link: COURT ENJOINS OREGON WOMAN FROM SELLING TAX SCAM.  Here is another example of how the Justice Department is prosecuting the "corporation sole" scam, which is being used to evade taxes. 

Corporation sole statutes are supposed to facilitate the ownership of assets - especially real property - by churches and religious orders.  Since the typical church is organized as a tradtional nonprofit entity, the false assumption made by promoters is that the corporation sole is somehow exempt from tax filing.   This dangerous strategy has become fairly popular by many anti-tax fanatics.  In fact receives several of these entity filings every week from all over the country.

You have to wonder at the thought processes of people who buy into this.  How can an entity that is filed by a state jurisdiction be exempt from federal taxes?  Only entities that have gone through the process of receiving non-profit status - which isn't easy - can claim any tax exemption of any kind.
- Derek Rowley