You have likely heard the old adage “The only sure things in life are death and taxes.” In the United States, the adage certainly applies. Without a doubt, most Americans pay their share of taxes. Americans also like to find creative ways to reduce their tax burden. Using legitimate tax reduction strategies is perfectly legal; however, in the endless search for a tax break some people fall for outlandish claims relating to “tax-free” Trusts made by “tax protesters” that could land them in jail instead of saving them money. Actor Wesley Snipes is a perfect example of an innocent victim of bad advice – at least that’s what his defense counsel claimed at his trial several years ago. Whether he was a willing participant in a tax evasion scheme or an innocent victim of a persuasive shyster we may never know. We can, however, learn some valuable lessons from his very public tax evasion trial.
Award winning actor Wesley Snipes made close to $40 million between 1999 and 2004, yet paid absolutely nothing in income tax during that time period. In fact, he didn’t even file income tax returns for the years in question. Eventually, Uncle Sam caught on and filed criminal tax evasion charges against Snipes. Snipes and his co-conspirators, an accountant and an anti-tax ideologue, argued that a technicality in the Internal Revenue Code allowed him to escape taxation of his earnings. More importantly, the actor’s defense team argued that Snipes should not be found guilty because he relied on the advice of those co-conspirators. The jury bought his defense, finding him not guilty of the most serious charges. Although Snipes avoided a potential 16 year prison sentence, he did eventually have to serve some time in a federal prison and owed a small fortune in back taxes, penalties, and interest.
The Tax Protester Movement
Although the details of Snipes’ finances were never released, it appears by his association with his co-conspirators that Snipes may have fallen victim to one of several common arguments made by tax protesters. What these arguments have in common is that they all claim to provide a legal basis for not paying income tax. One argument claims the 16th Amendment (which allows Congress to levy an income tax) was never legally ratified. Another argues that signing an income tax return under penalty of perjury violates your 5th Amendment right against self-incrimination.
The “Pure Trust” Scam
One of the most common tactics used by tax protesters is the “Pure Trust” argument. Also known as a “Constitutional Trust” or “Common Law Trust,” proponents of these Trusts argue that income earned by the Trust does not incur income tax and assets held by the Trust are not subject to gift and estate taxation. They are often touted as “Asset Protection Trusts” with promises of complete privacy and tax avoidance. Unfortunately, unsuspecting taxpayers fall victim to these tactics all the time – often with devastating financial consequences down the road.
There are many websites abound with explicit, or implied, claims that a Trust can be created which will shelter your assets from the Internal Revenue Service, effectively avoiding all taxation on the assets held by the Trust. The websites claim not only will of your assets be held tax-free, but they will also be out of the reach of creditors, divorcing spouses, and even the bankruptcy court, according to proponents of these “Pure Trusts.” The reality, however, is that there is no such thing as a “Pure Trust.” Sadly, many hard working, otherwise law abiding taxpayers only find this out after they have lost the assets that were supposed to be protected and/or have been hit with a huge bill from the Internal Revenue Service for back taxes.
The Real Asset Protection Trust
The good news is that there are legitimate methods of protecting your assets from creditors and spouses, including a True Asset Protection Trust. Legitimate strategies also exist that can be used to reduce your tax obligation. An experienced estate planning attorney can explain how these strategies can be incorporated into your estate plan. In the meantime, remember that “if something sounds too good to be true, it probably is.” Don’t believe outlandish claims that promise tax-free income. If you are unsure about something you read, consult with an experienced estate planning attorney for guidance.
This article should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.