If It Sounds Too Good to Be True, It Probably Is.

Recently, criminal investigations into bogus trusts from across the country have received national attention, including several from Michigan.

In 2001, the Internal Revenue Service (IRS) issued a nationwide alert warning taxpayers not to fall victim to tax scams of "untaxing" oneself

from the system. Currently, there are several prevalent fraudulent schemes being promoted including both domestic and foreign trusts. These schemes often are introduced by a network of promoters and sub-promoters that may charge from $5,000 to $70,000 for their services. The targeted audience is usually upper-income professional and business taxpayers, who make more than $100,000 a year.

One Michigan promoter, John Modena, received a 60-month sentence for conspiracy to commit income tax evasion for creating and promoting a "sham" trust. As part of the conspiracy, the promoter assisted five brothers, Denver, Daniel, Jack, Orval, and Timothy Russell, who owned a metal die cast business. As part of their scheme, they used a business trust to conduct personal business and make personal purchases. The brothers received sentences ranging from 33 months to 54 months imprisonment.

A Michigan dentist, Dr. Lyle Hotchkiss, was sentenced to 27 months of imprisonment for tax evasion. As part of his scheme, he deposited receipts totaling $1.5 million in taxable income from his dental practice into fraudulent trusts. The judge found that the sham trusts used by Hotchkiss were for tax evasion purposes and to funnel money out of the country.

In 1996, the IRS first became aware of the emerging magnitude of the bogus trusts when the owner of a Grand Cayman Islands bank began cooperating with Federal authorities and provided financial information on hundreds of individuals who appeared to be engaging in on-going tax fraud. As a result, the IRS issued Notice 9724 announcing a nationwide crackdown on bogus trusts. The Criminal Investigation department of the IRS did nor start to track these investigations until the end of 1998.

A legitimate trust is a form of ownership, which is controlled and managed by a designated independent trustee that completely separates responsibility and control of assets from the benefits of ownership.

The IRS recognizes numerous types of legal trust arrangements, which are commonly used for estate planning, charitable purposes and holding assets for beneficiaries. The independent trustee manages the trust, holds legal title to trust assets and exercises independent control. The income the trust receives, whether from foreign or domestic sources, is taxable either to the trust, the beneficiary or the taxpayer unless specifically exempted by the Internal Revenue Code (IRC).