Tax savings plans of varying legality are marketed heavily to doctors and other high-income earners on a bi-annual cycle: every spring before Tax Day and every fall before the end of the calendar year. We take a two-part look at the basic rules to be aware of and some specific tax plans that require extreme caution and due diligence, relying heavily on guidance from the I.R.S.
As important as tax avoidance planning is to every physician’s wealth preservation plan, it’s important that the plan you chose is legally compliant to avoid legal jeopardy and expenses for tax evasion that are often a multiple of what simply paying the taxes would have been in the first place. In some cases, the taxpayer is simply conned into buying they shouldn’t by the “promoter” of the plan. In other cases, it may be a case of affinity fraud where you are sold a plan based on a personal relationship or because the promoter has sold the same planning to those you know. Either way, just as with Ponzi schemes, people often buy bad planning for two core reasons, because they are promised numbers that are too good to be true and because they are being told what they want to hear, even if they should know better. The IRS is aggressively pursuing actions against both the promoters of these schemes and the taxpayers who participate in them.
Basic General Rules About Tax Every Doctor Must Know
- U.S. citizens are taxed on a worldwide basis and must pay taxes on income and report accounts held or earned anywhere in the world.
- Assets held in an offshore trust, LLC, corporation, foundation, or similar device are not an exception to your obligations as U.S. taxpayer. You are usually still the beneficial owner or beneficiary of the legal entity, absent a formally executed and reported completed gift, and income earned by the entity is attributable to you for tax purposes.
- This is still true whether you take a distribution, transfer those funds to an American account, hold them offshore, or simply spend them outside the United States.
- No matter whose advice you rely on or how much you paid for the advice or planning, you are always personally responsible for the accuracy of the information on your tax return and the legality of any tax strategy you employ.
- Penalties for engaging in abusive planning and tax evasion may be civil or criminal and in addition to the disallowance of the deduction or other benefit can result in fines, penalties, and interest in addition to the original amount due and legal defense fees that may be required.
- Remember the “Rule of Three”, strategies that allow all three of the following are often abusive tax shelters, you have to pay somewhere:
- Contributions are tax deductible as opposed to being made with “after tax” money
- Growth is tax free
- Distributions are tax free
- Any planner that requires you sign a non-disclosure agreement about their strategy, and they work they will do for you should be a red flag. There is very little that is “proprietary” about U.S. tax law and if the strategy is legitimate the plan promoter should be able to point to specific tax code that supports it, and that can easily be verified by your own CPA or tax lawyer.
- Scam promoters don’t want your CPA, lawyers, etc. to see and question their work, so they will often preemptively frame it as a strategy that is, “Too sophisticated for your local CPA or lawyer to know about and use”.
- In some cases, tax shelter promoters will use the names of notable people as proof of the validity of the strategy. Essentially the pitch is, “Person X (who is rich, famous, powerful, etc.) uses this plan and they are very smart. Therefore, it must be legal”. In most cases, the famous people named are not using the strategies at all, in a few others, they’ve been taken as well.
- Any tax avoidance strategy involving the phrases Pure Trust, Maritime Trust, Constitutional Trust, or Sovereign Trust, (among others) should be treated with extreme caution. These are hallmarks of common scams that frivolous arguments and claim to create tax free income and provide asset protection benefits; they fail on both counts.
In the next installment, we’ll look at some specific plans to avoid.
About the Author
Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter. Learn more at www.ProAssetProtection.com.