Academic journal article Journal of Accountancy

Watch out for Abusive Trusts

Academic journal article Journal of Accountancy

Watch out for Abusive Trusts

Article excerpt

The Internal Revenue Service issued a warning for taxpayers using trusts to illegally avoid individual or corporate income taxes. In information release 97-19, IRS Chief Compliance Officer James Donelson said the IRS receives more than 3 million trust returns annually and intends to review all questionable returns. "We'll assess taxes and penalties against the participants and promotes of the trust arrangements we find abusive and will seek criminal charges when warranted," said Donelson.

The arrangements of most concern to the IRS ignore the true ownership of assets or the substance of transactions. Promoters of such trusts claim they allow owners to retain full benefit from doing business or personal assets while reducing or eliminating taxes. According to the IRS, taxpayers often use multiple trusts to cover the different financial aspects of their lives. For example, a taxpayer may put a business in an unincorporated business trust, place a home in a family residence trust and set up a foreign trust to hold the other trusts and receive their income.

"CPAs should use common sense when they review their clients' tax returns," said Robert A. Blume, a member of the American Institute of CPAs trust, estate and gift tax committee and vice-president of the Washington Trust Bank in Spokane. He said CPAs should always ask clients with multiple trusts the following questions:

* What are the purposes of the trust arrangements? …

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