Criminal Defense Lawyers

What is Abusive Tax Scheme

An abusive tax scheme is any arrangement designed to make the IRS think you don’t control money that you actually control. That’s the core of it. The IRS doesn’t care what the paperwork says. They care what actually happened. If you’re spending money, making decisions about money, and benefiting from money – you control that money. No amount of trusts, corporations, or offshore structures changes that reality. You can create an eight-layer structure of sham entities with foreign bank accounts and professional nominees. The IRS will trace every dollar back to you. The complexity that was supposed to hide everything becomes the evidence that proves fraud.

Welcome to Spodek Law Group. We’re putting this information on our website because abusive tax schemes destroy people who thought they were being smart about their taxes. They paid promoters tens of thousands of dollars for “tax planning.” They filed returns that matched the structure the promoter designed. They believed they were following expert advice. Then they discovered that the expert was a fraudster, the advice was criminal, and they’re personally liable for everything. Todd Spodek has represented clients who were shocked to learn that their “sophisticated tax planning” was actually a federal crime. They thought they were reducing their taxes. They were building a prison sentence.

The IRS has identified over 40 types of abusive tax schemes currently in circulation. They publish an annual “Dirty Dozen” list warning taxpayers about the most common scams. The promoters keep selling anyway. And the conviction rate for these cases is devastating – Fisher and Sinnott, a CPA and an attorney who sold $1.3 billion in fraudulent conservation easement deductions, got 25 and 23 years in federal prison respectively. This isn’t hypothetical. This happens constantly.

What Makes a Tax Scheme “Abusive”

Heres the distinction that matters. Legitimate tax planning arranges your affairs to minimize taxes within the law. Abusive tax schemes create paper structures that dont match economic reality. The difference is whether substance matches form.

Think about how these schemes actualy work. A promoter tells you to assign your business income to a “business trust.” That trust distributes to another trust. That trust distributes to a third trust. Each trust claims deductions matching or exceeding its income. The final trust “donates” whats left to a private foundation that “loans” the money back to you tax-free. On paper, you dont own anything. In reality, you control everything – you still make all the decisions, you still spend the money, you still live the same lifestyle. The IRS looks at economic substance, not paper structure. If the structure dosent change your economic position in a meaningful way beyond tax effects, its abusive. The sophistication that promoters claim protects you actualy proves fraud. Legitimate tax planning dosent need eight layers of sham trusts to work.

The IRS Has Catalogued Every Scheme

Heres something that should concern anyone considering these arrangements. The IRS has catalogued the entire industry. They know exactly what schemes are being sold, how they work, and who is selling them.

Every year, the IRS publishes its “Dirty Dozen” list – twelve tax fraud scams that taxpayers should avoid. The 2024 list includes syndicated conservation easements, micro-captive insurance, Maltese retirement arrangements, and improper Employee Retention Credit claims. These arent secret schemes the IRS hasnt discovered yet. These are schemes the IRS has publicaly identified and is activly targeting.

The irony is brutal. The IRS tells you exactly which schemes there investigating. The promoters keep selling them anyway. People keep buying them anyway. The government literaly publishes a warning list, and taxpayers still hand over tens of thousands of dollars for arrangements the IRS has already flagged as fraudulent.

Currently, the IRS is aware of over 40 types of abusive tax schemes involving promoters. Theyve tracked the evolution of these schemes from simple offshore trusts to sophisticated multi-entity structures. Every variation, every iteration, every “new” approach – theyve seen it before. Your promoters “innovative” strategy is probly already in there files.

The Trust Factory

Heres how the trust scheme industry actualy operates. Promoters sell packaged “tax solutions” to high-income clients. The client pays $25,000 to $50,000. In return, they get a structure – typically a series of trusts designed to make income disappear on paper while remaining available in practice.

Timothy McPhee and Larry Conner ran exactly this operation. Since 2017, they promoted and sold abusive trust tax shelters to clients nationwide. They instructed clients to assign legitimate business income to sham trusts. The paper trail made it appear the client no longer controlled the money. But the clients continued to benefit from and control the income – they just didnt report it.

McPhee and Connors scheme resulted in tens of millions of dollars in unpaid federal taxes. There clients thought they were getting sophisticated tax planning. They were buying criminal exposure.

Kent Ellsworth was an Arizona tax preparer who participated in the same type of scheme. He filed over 500 false tax returns for approximately 60 clients nationwide. He intentionaly caused more then $60 million in income to be fraudulently sheltered from the IRS. The tax loss to the government was approximately $17 million. Five hundred returns. Sixty clients. This isnt a mistake. This is an industry.

How Schemes Get Exposed

Heres something promoters dont tell there clients. Someone in the scheme might be paid to turn you in.

The IRS Whistleblower Program pays awards of 15% to 30% of the funds collected from tax fraud. Since 2007, the IRS has paid $1.1 billion in awards to over 2,500 whistleblowers. Those payments were based on $6.6 billion collected from non-compliant taxpayers. Bradley Birkenfeld, a former Swiss banker who exposed tax shelters at UBS Bank, recieved $104 million – the largest whistleblower award in history.

Think about what this means. Your accountant, your ex-spouse, a disgruntled employee, the promoters former assistant – any of them could file Form 14242 to report the scheme. They dont have to identify themselves. They just have to provide enough information for the IRS to investigate. And if the IRS collects, the whistleblower gets paid.

Form 14242 is the IRS form for reporting suspected abusive tax promotions or preparers. Anyone can file it. The IRS Lead Development Center in the Office of Promoter Investigations follows up on every referral. Cases get routed to Criminal Investigation. And heres the uncomfortable part – the IRS legally cannot notify you about the status of the investigation. The system goes silent after the report is filed. You might not know theres an investigation until charges are filed years later.

The Promoter Pipeline

Heres how the IRS actualy catches these schemes. They built an entire federal apparatus specifically for this purpose.

In 2021, the IRS created the Office of Promoter Investigations. This office leads and directs all major activities that detect and deter abusive tax promotions. They coordinate with IRS Criminal Investigation and the Department of Justice. There mission is to identify promoters early and coordinate enforcement against them.

The Lead Development Center within this office processes every Form 14242 referral. They analyze the reports. They identify patterns. They route cases for further action. Referrals can lead to injunctions against promoters, monetary penalties, suspension of electronic filing numbers, criminal prosecution, and referral to the Office of Professional Responsibility. And heres the system revelation that matters. The IRS requires material advisors to maintain lists of everyone they advised about reportable transactions. Your name is in a database. When the IRS subpoenas the promoters records, they get a list of every client who bought the scheme. The promoter who told you this was safe is legally required to keep records that identify you.

The People Who Built Prison Sentences

Lets look at what happens to the people who create and promote abusive tax schemes.

Jack Fisher was a certified public accountant. James Sinnott was an attorney. Together, they sold over $1.3 billion in fraudulent syndicated conservation easement tax deductions. They promised clients deductions of 4.5 times what they paid. They used inflated appraisals, backdated documents, and sham transactions. In January 2024, Fisher was sentenced to 25 years in federal prison. Sinnott got 23 years.

Eddie Ray Kahn promoted tax defiance schemes through his Florida business, American Rights Litigators. He sold packages telling clients they didnt have to pay federal income tax at all. He got 20 years in federal prison – longer then many people convicted of violent crimes.

Michael Shanahan promoted abusive trust arrangements in Washington state. He got 36 months. The schemes he sold werent sophisticated offshore structures – they were domestic trusts designed to hide income. He called it “tax planning.” The IRS called it “criminal activity.”

These arent aberrations. This is what happens to tax scheme promoters.

The Investor Trap

Heres the paradox that destroys scheme participants. You relied on the promoters expertise. You filed returns based on there advice. They assured you it was legal. Now the promoter is facing prosecution – and you still owe every dollar.

Ryan Ulibarri is a Colorado dentist. He allegedly paid $50,000 for a tax shelter in 2016. He allegedly used it to shelter over $3.5 million in income over six years. He transferred funds from his dental practice to trust accounts, paid personal expenses from those accounts, and filed returns that assigned the income to the trusts. Now hes facing federal charges. Five years in prison for each count of tax evasion.

The trap is simple. You can rely on the promoters representations in good faith. You can genuinely beleive the scheme is legal. It dosent matter. Taxpayers remain responsible for the contents of there returns regardless of who advised them. The promoters conviction dosent reduce your tax debt. There criminal exposure dosent eliminate yours.

Think about the cascade. You buy a scheme. Years later, the IRS identifies it as abusive. The promoter gets prosecuted. Your name is on there client list. The IRS contacts you. You discover your “tax planning” was fraud. Now your facing criminal exposure, civil penalties, and the original taxes plus interest. The promoter is in prison. Your still liable for everything.

The Whistleblower Economy

Heres something that creates a permanant vulnerability for anyone in an abusive scheme. Theres an entire economy built around exposing tax fraud.

Bradley Birkenfeld was a Swiss banker at UBS. He helped wealthy Americans hide money offshore. When he decided to cooperate with the IRS, his information led to a $780 million fine against UBS and a fundamental restructuring of offshore banking secrecy. His reward: $104 million.

Since 2007, the IRS has paid $1.1 billion to whistleblowers. Those payments generated $6.6 billion in collections. The economics are clear – the government pays informants becuase informants produce results.

Every abusive tax scheme involves multiple people. Promoters, accountants, attorneys, administrators, trust officers, bank employees. Any one of them could become a whistleblower. Any one of them could decide the risk isnt worth it, or that $104 million is more attractive then criminal exposure. Your scheme involves people who have every incentive to trade your information for money and immunity.

The Anatomy of a Scheme Prosecution

Heres how these cases actually unfold. The IRS dosent just stumble upon abusive schemes. They build cases systematically over years.

First comes the investigation. Someone files a Form 14242. Or the IRS identifies the scheme through there own analysis of patterns. They start tracing money – were it came from, were it went, who controlled it at each step. They subpoena bank records, trust documents, corporate filings. They interview participants. They build a timeline.

Then comes the promoter prosecution. The Department of Justice files charges against the people who designed and sold the scheme. This generates publicity. Other participants start to panic. Some try to amend returns. Some hire lawyers. Some do nothing and hope they wont be noticed.

Finally comes the investor exposure. The promoters records contain client lists. The IRS now knows everyone who participated. They work through the list. Some clients face civil audits. Some face criminal referrals. The difference often comes down to timing – clients who addressed the problem proactively before criminal referral have better options then those who waited.

The entire process can take years. Fisher and Sinnott sold schemes starting in 2008. There prosecution happened in 2023-2024. Fifteen years of scheme activity before the final sentences. But those sentences – 25 and 23 years – show the government plays the long game.

The Conviction Reality

IRS Criminal Investigation achieves conviction rates above 90% on cases they accept for prosecution. For abusive tax schemes specificaly, the evidence is often overwhelming. Bank records show money flows. Trust documents show the paper structure. Tax returns show what was reported. The gap between paper and reality is obvious.

The penalties compound. You owe the original taxes. Plus accuracy-related penalties of 20-40%. Plus the fraud penalty – up to 75% of the underpayment. Plus interest thats been accruing for years. By the time resolution comes, the original tax debt may have tripled or quadrupled.

Criminal penalties add another layer. Tax evasion carries up to five years per count. Aiding and assisting a false return carries three years. Wire fraud and mail fraud – often added to scheme prosecutions – carry up to 30 years each. Fisher and Sinnotts combined sentence of 48 years wasnt unusual. It was the system working as designed.

And heres the part nobody mentions. Promoter injunctions stop schemes but dont refund victims. The government shuts down the operation. The promoter faces prosecution. You still owe everything you owed before. The scheme being declared abusive dosent reduce your liability – it just adds criminal exposure to civil debt.

The Civil vs Criminal Line

Heres something that creates permanant anxiety for scheme participants. The difference between civil liability and criminal prosecution often comes down to factors outside your control.

Civil liability means you owe the taxes, penalties, and interest. Its expensive. It can be financially devastating. But its not prison. You work out a payment plan. You negotiate with the IRS. You move forward with your life.

Criminal prosecution means federal charges, potential conviction, and incarceration. The standard is “willfulness” – did you intentionaly violate a known legal duty? The government proves willfulness through circumstantial evidence. You signed returns you knew were false. You participated in complex structures that had no purpose besides tax avoidance. You continued the scheme after receiving IRS notices. Each fact builds the willfulness case.

The IRS has discretion about which cases to refer for criminal prosecution. High dollar amounts attract attention. Long-running schemes attract attention. Sophisticated structures attract attention. Clients who cooperate early often stay on the civil side. Clients who obstruct, lie, or wait too long end up facing criminal charges.

You dont control which side of the line you fall on. But you can influence it through early action.

What This Means For Your Taxes

If youve participated in any arrangement that separated the paper ownership of income from the reality of who controlled it – trusts you funded and continued to use, corporations you formed and continued to dominate, structures that let you spend money while claiming you didnt own it – you need to understand the exposure.

Heres the inversion that matters. The question isnt “did you know it was illegal.” The question is “did you sign the return.” Your signature on a false tax return makes you liable regardless of who told you to file it. Knowledge of the schemes illegality isnt required for civil liability. Willfulness – which the IRS can often prove through circumstantial evidence – triggers criminal liability.

Clients come to Spodek Law Group after discovering there “tax planning” was actually tax fraud. They trusted promoters. They filed returns based on that trust. Now the promoter is under investigation, there name is on the client list, and the IRS is coming. The question is whether to address it proactivly or wait untill criminal charges are filed.

If your involved in any arrangement that seems to good to be true – deductions that far exceed your investment, structures that separate you from income you clearly control, “sophisticated” planning that requires multiple layers of entities – you need to understand what your actualy participating in. Early intervention can sometimes resolve these matters civily. Waiting until prosecution means negotiating from the weakest possible position.

Todd Spodek has handled cases exactly like this. We understand how the IRS investigates abusive schemes, what evidence they use, and were the defenses might be. If your facing potential scheme liability, the question is whether to act now or wait until the consequences multiply.

Call us at 212-300-5196. The consultation is free. The IRS is already building cases against these schemes. Loosing everything becuase you trusted the wrong promoter isnt something you have to accept.