It’s hard to hide one billion dollars from the IRS, as a Dallas attorney allegedly found out recently. The man is accused of creating tax shelters to help high-net-worth clients conceal giant sums of money in income from the IRS.
What did he allegedly do? According to the U.S. Attorney for the Northern District of Texas, the 79-year-old was indicted on 18 counts of wire fraud, one count of conspiracy to commit wire fraud, and 22 counts of aiding and assisting in the preparation of fraudulent income tax returns. He’s accused of creating multiple shell companies – including shell “services” companies and shell “investments” companies – to create “a circular flow of funds to help clients avoid paying taxes.”
“These shell companies purported to provide services to the clients’ businesses or to serve as family investment vehicles, but actually had no legitimate purpose other than to move money,” the office states. “[He] and others allegedly created sham operating agreements, sham service agreements, phony invoices, and false private annuity agreements designed to give the companies the appearance of legitimacy and conceal the scheme from the IRS.”
Shell companies conduct financial transactions and can hold assets but have no significant business activity. They aren’t inherently illegal. For instance, there are legitimate reasons to set up a shell company as an offshore account. As we’ve said before, overseas accounts can be great tools for those who earn or spend money abroad, and they can sometimes offer privacy and protection that domestic accounts may not. A startup may also be set up as a shell company to raise funds or prepare to go public.
But because shell companies offer anonymity, they’re notorious for being vehicles for illegal purposes. In this case, the attorney is accused of using them to assist clients in the preparation and filing of fraudulent tax returns, including:
- Falsely deducting business expenses for services that were never performed.
- Falsely reporting gross receipts for payments that were not earned.
- Falsely deducting payments from the investment company to the taxpayer for annuities that didn’t exist.
- Underreporting the individual taxpayers’ incomes.
Can you believe the scheme allegedly resulted in more than $1 billion in unreported income and more than $200 million in unpaid taxes? It’s no wonder the IRS pursued it. If convicted, the man faces up to 20 years in prison for each of the 18 counts of wire fraud, 20 years in prison for conspiracy to commit wire fraud, and three years in prison for each of 22 counts of aiding and assisting in the filing of false federal income tax returns. For more on legitimate tax minimization strategies and how to spot red flags, feel free to contact us.