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DOWN MEMORY LANE WITH THE DEPARTMENT OF JUSTICE

March 27, 2007

The feds have been tying up loose ends on three old tax scams in recent weeks. These are all good midwestern scams, showing that tax fraud isn't just confined to the financial Gomorrahs on the coasts.

For starters, a Mitchell, South Dakota man, Kerwin Millear, pleaded guilty to tax charges involving the "Aegis" scheme to use trusts and management fees to illegally hide taxable income offshore.

Meanwhile, a principal of the Topeka-based "Renaissance - The Tax People" multilevel marketing tax scheme pleaded guilty to defrauding gullible customers of $70 million and causing a tax loss of $20 million. Todd Strand's plea resulted from his role as "national marketing director" for a "service" that sold through a multi-level marketing plan that told people they could deduct personal expenses. Given that size of tax loss, Mr. Strand could be going away for the full 10-year maximum sentence. Taxable Talk has more.

Finally, James Auffenberg, an Illinois car dealer, was indicted on charges of evading taxes through use of a Virgin Islands tax credit scheme. Several promoters of the deal were also charged. From the Department of Justice Press Release:

The indictment alleges that Mr. Auffenberg joined a partnership, Kapok Management, L.P., which was created and promoted by Ferguson and Fagan in the U.S. Virgin Islands. As part of the scheme, Kapok Management fraudulently used a Virgin Islands economic development program (EDP), designed to promote the development and diversification of the local economy and establish employment opportunities for island residents. Businesses which participated in the EDP, like Kapok Management, received a "beneficiary certificate" which granted them a 90% tax credit on federal and 100 percent exemption on local taxes. In order to claim the tax credit, the certificate holder had to earn income "effectively connected" with the conduct of a trade or a business in the Virgin Islands and be a bona fide resident of the U.S. Virgin Islands.

Ferguson, Fagan and Jackson allegedly promoted the scheme to wealthy individuals, who would join Kapok Management as limited partners. As part of that scheme, the limited partner formed single- member limited liability companies (LLC) in the United States and the U.S. Virgin Islands, respectively. The U.S. LLC entered into a management agreement with Kapok to purportedly manage the partner's stateside business and paid purported "management fees" to Kapok. Within approximately 3-5 days, the monies were returned to the limited partner as "partnership distributions" which were paid to the limited partner's Virgin Islands LLC, less a fee of 5 percent kept by Kapok Management.

According to the indictment, no management services were provided by Kapok Management to the mainland businesses. In addition, the amounts paid as purported "management fees" were determined by each limited partner, not Kapok Management, and the promoters encouraged them to "recycle" the same funds in and out of Kapok Management's bank account, as many times as the limited partner wished, to fraudulently maximize the EDP tax credit.

The common themes running through these deals are that they were promoted by salesmen, not by tax pros. Two of these deals also involved offshore management fees, a common tax scam tool. No matter how much your golfing buddy insists that the offshore tax plan sold by his buddy's brother-in-law is foolproof, always have your tax pro look under the hood before you jump in. It's well worth a few hours of your tax pro's time to avoid 36 months at Club Fed.

UPDATE: More from the St. Louis Post Dispatch on Mr. Auffenberg.

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