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U.S. Files Suits in Crackdown on Tax Scams

Courts: Three people allegedly sold bogus trusts that defrauded the government of more than $135 million.

April 11, 2002|KATHY M. KRISTOF | TIMES STAFF WRITER

The Justice Department said Wednesday that it filed a series of lawsuits as part of a continuing crackdown on complicated tax schemes that cost the federal government an estimated $3 billion a year.

In suits filed in San Diego, Boston and Cincinnati, the government alleges that three individuals defrauded the U.S. of more than $135 million by selling bogus trusts to hundreds of taxpayers.

Trusts are legal entities that can hold assets and be used to distribute property.

Bogus trusts, especially offshore trusts, have become a hot area for tax cheats, who often use them to disguise the true owner of taxable assets.

The Internal Revenue Service is cracking down on the trusts, which are heavily promoted in advertisements and over the Internet.

"Today's technology has made marketing tax fraud schemes incredibly easy," said Eileen J. O'Connor, assistant attorney general in charge of the Justice Department's tax division.

"While the promoters of these schemes say they lead to tax savings, they can lead instead to substantial penalties, including a prison sentence," O'Connor said.

Trusts can be used for many legitimate business and estate planning purposes, such as leaving an inheritance to a minor child or a charity.

However, the IRS has been pursuing promoters who establish multiple trusts that are used to hide the true owner of taxable income or to fabricate deductions.

In addition to asking that the defendants be barred from violating tax laws in the future, the Justice Department is asking the courts to force the promoters to turn over lists of clients, who could then be targeted for future tax audits.

The IRS is increasingly employing this strategy to catch thousands of cheating taxpayers. The agency recently reached agreements with several large credit card issuers that will provide records of their clients' credit card transactions from offshore banks. These banks often are used by U.S. residents who hold their assets in offshore trusts to avoid income taxes, accessing their money with credit cards.

The IRS believes that as many as 2 million Americans may be skirting tax laws by using these offshore trusts. The credit records are expected to help the agency establish the extent and nature of the cheating, potentially leading to thousands of prosecutions for tax evasion and fraud.

In the case filed Wednesday in San Diego, the government alleges that Roderick Prescott of Solana Beach sold hundreds of scam trust packages through a company called Trust Educational Services.

The program Prescott promotes involves setting up a series of business and personal trusts that will hold the taxpayers' personal property, ranging from homes to cars and equipment. The trusts then charge each other for services, creating fictional tax deductions, the suit alleges.

The taxpayer's home is called "trust headquarters," allowing the taxpayer to improperly deduct living expenses as business costs related to managing all of the trusts.

Prescott denied the allegations Wednesday, but said he had not yet seen the complaint.

"Anything and everything we have advocated has always been in keeping with IRS codes and regulations," said Prescott, who said he runs a seminar business. "I don't sell trusts. I sell education. We have always advocated that people pay whatever taxes are due."

In the Boston case, filed against Kevin Mahoney of Attleboro, Mass., the U.S. alleges that Mahoney sold so-called pass-through trusts. Individuals use this type of trust to deduct all personal expenses by using a series of trusts. The U.S. alleges the trusts are a sham and seeks to enjoin Mahoney from selling or promoting them.

Mahoney said he prepares legal documents on behalf of attorneys, but has never advocated tax fraud.

"Somehow, the IRS has decided to make us the soup of the day and say that we are doing something illegal. That is absolutely not true," Mahoney said. "We advocate paying whatever tax you owe."

Robert Welti, an accountant from Ripley, Ohio, was charged in the suit filed in Cincinnati with preparing false tax returns for clients in 20 states. Welti's actions, which involve setting up trusts based in Belize, have cost the government an estimated $3 million a year, according to the Justice Department's complaint.

Welti said he was acting properly. It's the IRS and the Justice Department that are breaking the law by assessing income taxes on money earned while working in the United States, he said.

Citing a series of books and Internet sites, Welti said only income derived from foreign sources or criminal activity is taxable. The IRS maintains that such arguments are frivolous and the agency's position has been consistently upheld by federal tax courts.

The government suit seeks to bar Welti from preparing future tax returns and force him to provide a list of his clients.

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