Tax Secrets: Careful, tax scams abound

Irv Blackman
Finger at "SCAM ALERT" On Keyboard Button

Like the practice of medicine, each professional tax practitioner has specific areas of expertise. Because of this fact, any particular tax professional may have little or no knowledge about matters that are outside his/her area of specialty. This lack of a central storehouse of knowledge leaves the door open for tax scams; the equivalent of quacks in medicine. We call ‘em tax-scam artists.

More:Tax Secrets: Eliminate your estate tax liability

Sad but true: Looks like snake oil has been replaced by tax scams. The tax law is complicated. Very complicated. We have never met (nor heard of) even one tax practitioner who claims to know it all. There is no one place – certainly not the IRS – you can go to and be certain you are getting the right answer to your tax questions or how to solve your tax problems.

With income tax rates reaching 40 percent or more (State and Federal combined) and federal estate tax rates currently at a high of percent (plus what your home State might grab) the dollar incentive for creative tax-scam artists has become a big (very illegal) and profitable business. Often, victims are innocent of any wrong doing, having succumbed to glib explanations and good-looking phony documentation.

Following is a list (by no means intended to be complete) that should send up warning flares that you may be dealing with a tax-scam artist (let’s call him Art).

  1. Art tells you to sign a nondisclosure agreement prohibiting you from telling anyone else about Art’s scheme or showing any of his documentation. Legitimate advisors always welcome allowing others to review their proposals, even encourage you to get a second opinion.
  2. Any split-dollar insurance arrangement with a charity unless the IRS okays the specific strategy with a ruling or Congress passes enabling rules. Until then, say “no” to Art.
  3.  A concept – with many different names – that gets the value of your qualified plan (like a 401(k) or profit-sharing plan) near zero by investing the funds in a life insurance policy that has a zero or very low cash surrender value (CSV) to start. After you buy the policy from the plan at its then low value (near zero), the CSV jumps up quickly (called “springing CSV”). Do one of these deals and the IRS is almost sure to catch you. Interest and penalties will follow. What to do? Get a second opinion from an independent expert, not one of Art’s cronies.
  4. Art tries to convince you that you can avoid paying income tax on your current income by creating an offshore trust (or Art even tries to sell the same tax-free income tax result with a domestic trust). “Hogwash” describes both schemes. But yes, an offshore trust can indeed protect your assets from creditors (generally, only from claims arising after the trust was created).
  5. When Art claims he specializes in revocable trusts (often called “living trust” or a similar name) and that his one trust document can solve all your estate tax problems, BEWARE. This is a tough one, because sometimes – in the right circumstances – a revocable trust (particularly, for a small estate) can be all that you need. But it’s rare. Here’s the test: When you (and your spouse if you’re married) pass on, your heirs will receive all (I mean every dollar of it) your wealth without owing one cent of estate tax. But remember, it is rare. If in doubt, get a second opinion.
  6. If you live in a state that has either an inheritance tax or an estate tax (a few states have both), Art can cook up even more phony schemes. Always, but always Google him. Steer clear if anything goes not sound right.

Just a note here: There are many ways to beat up the IRS (legitimately) and legally avoid the estate tax … even if you are worth $10 million, $25 million or much more. Want to learn how?

Browse my website:

Do you have a special problem or concern? Call me (Irv) at 847-767-5296/or email me (