Analyzing Differing Tax Fraud Schemes As Filing Deadline Nears

March 2016

IN THIS ISSUE

— Offshore Companies, Abusive Trusts and More: Types of Tax Fraud
— Detecting Tax Fraud

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, we’ll examine different types of tax evasion and fraud schemes used by both individuals and corporations.

OFFSHORE COMPANIES, ABUSIVE TRUSTS AND MORE: TYPES OF TAX FRAUD

As millions of individuals prepare their tax returns, the types of schemes used to avoid paying taxes – and in some instances to gain illicit refunds — deserve scrutiny. While money laundering is not typically used solely for tax evasion purposes, it can be one part of a scheme, where ill-gotten gains are funneled into one company and used to buy equipment or other goods where aggressive depreciation can be claimed, or a leaseback arrangement put in place between companies, resulting in a reduction in taxable income.

Most often, however, companies – and individuals with the means to do so – use a combination of legal means and illegal methods to reduce their tax burdens. These can include forming legitimate offshore companies, although the U.S. Internal Revenue Service has also warned about the rise of “abusive foreign trusts,” where a series of “layered” domestic trusts pass operating income and expenses to a foreign trust in a tax haven such as the Cayman Islands, which often also provide a layer of opacity as to who actually controls such a trust.

DETECTING TAX FRAUD

Identifying sophisticated tax shelter schemes as they occur can be difficult, but a researcher is not without tools. While countries like the Cayman Islands do provide cover for the actions of principals involved, they have minimal reporting requirements, such as the publication of new company formations in various newspapers. These notices typically include the name and address of a company’s agent — if your company sees that a business or individual is using the same agent to start several businesses, researching the agent or his company could help identify key methods or people involved in setting up the companies in question.

The principle of knowing your customer, as well as your business partner, is especially true with respect to matters of tax evasion. If you begin to see unfamiliar entities in locations where a party has not done business before, some due diligence is a good idea in order to prepare for the event where a regulator, having obtained a list of vendors with your company’s name on it, comes to ask questions about the nature of your business relationship with a company suspected of tax fraud.