Anatomy of an Abusive Trust Tax Scheme Criminal Indictment

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Anatomy of an Abusive Trust Tax Scheme Criminal Indictment

Anatomy of an Abusive Trust Tax Scheme Criminal Indictment

Anatomy of an Abusive Trust Tax Scheme Criminal Indictment

On previous occasions, our team has written extensively about IRS abusive tax schemes – an issue that has recently become a key enforcement priority for the Internal Revenue Service. In August 2024, the United States government indicted a taxpayer who they allege participated in an abusive tax shelter scheme. The indictment does a great job of breaking down the specific allegations about how the defendant may have operated the tax shelter scheme to effectively avoid having to pay any income tax on earnings generated through his business. While it can be very alluring for taxpayers who are earning significant income and do not want to pay income tax to want to consider one of these types of trust tax schemes, it is also important to understand that the IRS actively investigates these types of matters — which may lead to tax fraud and tax evasion charges which may culminate with several years of incarceration, fines, and post-release restrictions. Let’s walk through the basics of how this abusive tax shelter worked.

What is an Abusive-Trust Tax Shelter

The reason that this type of transaction is referred to as an abusive trust tax shelter is that Defendant is seeking to abuse the U.S. tax system by sheltering money in a series of trusts to avoid having to pay income tax on the earnings. In this particular scenario, the Defendant already had a successful business that he was operating but wanted to avoid having to pay income tax on his earnings. As a result, he purchased an abusive trust tax shelter scheme designed to help him hide his income.

How did the Scheme Work?

The government alleges that the taxpayer first modified his S corporation from his original business and transitioned it into an LLC. Then Defendant created a series of trusts including a business trust and a charitable trust. The trust operates so that the income attributed to each trust is then pushed or donated downwards to the next successive trust (with the trust that pushes the income deducting expenses sufficient to bring the income to zero or close to zero)/ To illustrate the impact this had on the income tax liability, earlier in his career the defendant had paid hundreds of thousands of dollars in taxes whereas in the more recent years — and despite having seven figures of income — he only paid less than one or 2% in tax.

Taxpayers Should Be Careful Before Considering a Tax Shelter Trust

When the US government gets wind of these types of schemes, they typically will want to make an example of a person to dissuade other individuals from pursuing these types of sham trusts in this particular case. This defendant is facing both fines and potential incarceration if he is found guilty.

As provided by the DOJ:

Defendant Allegedly Concealed Over $3.5M in Income Using an Illegal Tax Shelter

      • “A federal grand jury in Denver returned an indictment unsealed on Friday charging a Colorado dentist with six counts of tax evasion for his use of an illegal tax shelter.

      • According to the indictment, since 2014, Ryan Ulibarri, owned and operated Ulibarri Family Dentistry in Fort Collins. In 2016, Ulibarri allegedly purchased a tax shelter for $50,000. From 2017 through 2022, Ulibarri allegedly used this tax shelter to conceal from the IRS over $3.5 million in income he earned.

      • To effectuate the tax shelter, Ulibarri allegedly signed trust instruments purporting to create three trusts and a private foundation and opened bank accounts in the name of each entity. He also allegedly re-structured his dental practice so that the majority of it was purportedly owned by one of the trusts. Ulibarri allegedly transferred nearly all the funds he earned from his dental practice to the bank accounts for the trusts and foundations he created. He allegedly used those funds to pay personal expenses, such as the mortgage on his home and his credit card bills. Finally, he allegedly filed false tax returns for himself and the trusts that assigned the income he earned and controlled from his practice to the trusts.     

      • In total, Ulibarri is alleged to have caused a tax loss to the IRS of over $1 million.

      • If convicted, Ulibarri faces a maximum penalty of five years in prison for each count of tax evasion. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

      • Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division made the announcement.

      • IRS Criminal Investigation is investigating the case.

      • Trial Attorneys Amanda R. Scott and Lauren K. Pope and Senior Litigation Counsel Corey J. Smith of the Tax Division are prosecuting the case.

      • An indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

      • Ulibarri Indictment.pdf

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.