A new tax scam is going around which is roping in business owners and professionals around the country. This scam is marketed by a financial company out of the Bahamas, but has been roping in insurance brokers, banks, and sometimes even estate planners to sell the scam for them.

The scam promises that a business can make a payment to an insurance company located in the Caribbean. The payments are ostensibly for business insurance premiums, though there is little evidence that any real insurance is being provided. The business owner takes a deduction for the insurance premiums paid.

At the same time, the business owner sets up an offshore trust, and the offshore trust essentially purchases an interest in the insurance company. The insurance company then takes the premium and makes a "distribution" of profits to the offshore trust. Sometimes, the shares in the offshore captive are owned by an offshore life insurance policy and are taken within that policy tax-free.

At the end of the day, the business owner has taken a deduction for his "insurance payment" and yet regained control of his money in the offshore trust or offshore life insurance policy. Sounds too good to be true? It is.

Although the scam is made to sound like a sophisticated and legal tax strategy, there is so much of it that is just plain hokey. For instance, the promoters put a "Attorney-Client Privileged Communication" header across the front page of their agreement letter for clients, yet further back in the letter they specifically disclaim that they are a law firm or are giving legal advice and state that they are a financial firm instead. Good luck in getting that privilege to stand up in court.

But aren't clients entitled to rely on the promoter's letter and opinion? No, for a variety of reasons. First, as just related, the promoters expressly disclaim that they are a law firm or are giving legal advice. Second, the letter that they provide to clients is what is known as a "promoter's letter" that can not be relied on after the recent Jobs Act. Finally, the letter will not even qualify as an opinion letter since it does not reasonably set forth the legal basis upon which the client can rely.

What does this mean? It means that clients are totally naked to fines, penalties, and criminal prosecution when this scheme blows up. In other words, if you are somebody who got caught up in this scheme, you are totally on your own.

Despite the promoter's assurances, this is big-time tax evasion which is also known as criminal tax fraud. The IRS will have no difficulty in setting aside this scheme under a variety of theories, such that the original insurance was bogus, the entire arrangement was a sham, and the step-transaction doctrine. But this scheme is so brazen that there is little doubt that criminal prosecutions will follow.

Law enforcement has been tracking this scam for some months and considers it to be extremely abusive.

So what is likely to happen? If past DOJ actions are any indication, expect the DOJ to first get an injunction against the promoters to stop them from further marketing the program, and also requiring them to provide their client and prospective client lists to the DOJ (who will of course turn them over to the IRS and IRS-Criminal Investigations). That the promoters are out of the Bahamas might slow down obtaining this information, but under a recent agreement with the Bahamas, the DOJ will ultimately be able to obtain their client lists as well as banking information in the Bahamas and Nevis (which now has a similar agreement).

Next, the DOJ will start criminal investigations of all those who paid premiums to the offshore insurance company, and will prosecute those who don't voluntarily come forward before they are contacted, plus a few high-profile defendants just to set an example for others. This is basically how the prosecutions of those who used offshore credit cards tied to unreported foreign bank accounts went.

So if you got caught up in this scheme, what should you do?

First, contact a tax attorney who practices in the area of controversy litigation or who is known for handling the defense of criminal tax cases. You will need him or her. If they can get to the IRS and DOJ before a criminal investigation against you is commenced, they may be able just get you to pay the taxes owed without any other ramifications, or going on the IRS's audit-list-from-hell for the next decade.

Second, absolutely do not take the deduction for the premiums you paid! Once you do this, you have committed criminal tax fraud. If you have already taken a deduction for premiums paid, talk to your tax attorney about immediately amending your returns and paying the back tax. Any action that you take now to remediate the situation and show that you were a victim of the scam, and not somebody intent on committing tax evasion, may help you later.

Third, have your tax attorney demand your money back. Even if the money has already been distributed to your offshore trust, demand that the promoters reverse the transaction so that your offshore trust refunds the dividend to the insurance company, and the insurance company refunds the premiums you paid. If you are successful in getting the transaction reversed, you may be able to claim later that the transaction ever occurred at all. At worst, it will support your later claim that you were a victim and doing everything you could to remediate the situation and comply with the law.

Fourth, be sure that your tax attorney reports everything that you are required to report, such as the existence of the offshore trust, any foreign bank accounts, and anything else that you could arguably be required to report relating to the transaction. Even if the transaction is reversed, consider filing returns that at least disclose the existence of the involved entities and transactions so that you can later show that you made full disclosure, and also get the Statute of Limitations for any tax liability running now.

Do not go back to the original advisor who got you into this scheme and expect that they will help you out. They exercised terrible judgment in getting you into the scam in the first place, and probably will not promote your best interests in getting you out of it. Because of referral fees and other consideration that they would have to repay, the odds are low that they will give you the best advice.

Instead, find an independent tax attorney to assist you, and consider making a demand on the advisor who got you into the scam to make a full disclosure to you for all compensation that they received because of the transaction, and any other relationship that they had with the promoters.

Bogus Loss of Income Policies Lead to Indictments

Press Release

Contact:
DONALD A. DAVIS
ASSISTANT U.S. ATTORNEY
PHONE: (616) 456-2404

MICHIGAN ATTORNEY AND CLIENT CHARGED WITH TAX CRIMES ALONG
WITH FOUR PROMOTERS OF FRAUDULENT INSURANCE TAX SHELTER

THURSDAY, MARCH 6, 2008- Grand Rapids, Mich. – A federal grand jury sitting in Grand Rapids, Michigan, returned a six-count superseding indictment yesterday, charging a Kalamazoo, Michigan attorney, his client, and four alleged tax shelter promoters with tax crimes. John A. Campbell, 63, of Portage, Michigan, a former partner with the law firm of Miller, Canfield, Paddock & Stone, P.L.C., was charged with one count of conspiracy to defraud the United States for his alleged conduct in helping four shelter promoters sell fraudulent tax shelters over a ten-year period. Campbell’s client, Oskar René Poch, 56, of Hickory Corners, Michigan, who owned and operated Trillium Staffing, an employee-leasing company in Kalamazoo, Michigan, was charged with one count of corruptly endeavoring to obstruct the administration of the Internal Revenue Laws. Finally, two of the four promoters were also charged with the attempted income tax evasion of Poch’s income tax liability for 1999 and 2000, because he purchased the fraudulent tax shelter in those years and deducted the premiums on his tax returns, and the promoters allegedly misled the IRS about those transactions. Poch was not charged in the conspiracy or with tax evasion. Poch has entered into a plea agreement with the government, which was also filed today.

Nathan J. Hochman, Assistant Attorney General for the Tax Division, United States Department of Justice, Charles R. Gross, United States Attorney for the Western District of Michigan, and Maurice M. Aouate, Special Agent in Charge, Criminal Investigation, IRS, Detroit Field Office, announced the superseding indictment today.

The four shelter promoters charged along with Campbell in the conspiracy are from all over the country. The superseding indictment charged that beginning in 1995, Peter J. Peggs, age 73, of Prides Crossing, Massachusetts, Robert Duane Larsen, age 63, of Winter Park, Colorado, and Anthony G. Merlo, age 55, of Fort Worth, Texas and the United States Virgin Islands, were involved in a criminal conspiracy, along with their tax attorney John A.Campbell, and Craig M. Stone, age 63, of Fort Pierce, Florida, that the indictment states joined the conspiracy in 1999, allegedly to defraud the United States by promoting, marketing, selling, and administering fraudulent tax shelters called loss-of-income (“LOI”) insurance policies. These policies were issued through Security Trust Insurance Company, a now-defunct company that was located in the U.S.V.I. which was formerly known as Caduceus Life Insurance Company.

According to the superseding indictment, Peggs, Larsen, and Merlo, who were officers, directors, and owners of Security Trust, and Campbell and Stone, promoted and sold LOI policies to wealthy clients in order to generate false tax deductions, and subsequently returned nearly all of the premiums to the U.S. taxpayer clients in a manner concealed from the IRS. During the duration of the conspiracy, more than $12,000,000 in premiums was collected.

According to the superseding indictment, Poch improperly deducted approximately $3,900,000 in insurance premiums paid by his companies to Security Trust in the years 1999, 2000, and 2001. The false deductions had the effect of reducing Poch’s individual income taxes in each of these years. The superseding indictment further alleges that as part of this scheme, the coconspirators improperly disguised the return of over $3 million to Poch as offshore funds available to Poch in the form of loans. The superseding indictment also charges Peggs and Larsen for their role in the attempted income tax evasion of the taxes owed by Poch for the years 1999 and 2000.

In furtherance of this scheme, the superseding indictment alleges that Peggs, Larsen, and Campbell lied to the IRS during its audit of Poch’s tax returns in 2002 and 2003. In addition, Peggs, Larsen, and Campbell also allegedly made material misrepresentations about the facts underlying this scheme to Poch’s tax court representative who was preparing to contest the IRS audit determination in United States Tax Court. Moreover, Poch was charged separately with providing false, misleading, and incomplete answers to the IRS in a June 2002 interview with the IRS during the audit of his tax returns. The superseding indictment alleges that Peggs and Larsen engaged in similar conduct with other clients and individuals in Massachusetts and Kentucky. One of the named unindicted co-conspirators, Bruce M. Cohen, of Louisville, Kentucky, pleaded guilty in 2007 to conspiracy charges in federal courts in both Ohio and Kentucky for his role in this scheme. Cohen is presently serving a 30 month prison sentence for his Kentucky conduct, and is awaiting sentencing in Ohio.

Conspiracy to impede the IRS and tax evasion each carry maximum punishments of five years’ in prison and a fine of up to $250,000. Corruptly endeavoring to impede the administration of the Internal Revenue Laws carries a maximum punishment of three years’ in prison and a similar fine. Assistant Attorney General Nathan J. Hochman and U.S. Attorney Charles Gross commended the investigative efforts of the IRS agents in the case, as well as Department of Justice Tax Attorneys Richard M. Rolwing and Patrick J. Murray, and Assistant U. S. Attorney Donald A. Davis, who are prosecuting the case.

The charges in the pending indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty in a court of law.

Additional information about the Justice Department’s Tax Division and its enforcement efforts may be found at http://www.usdoj.gov/tax.