Guilty Plea For Role In Directing And Promoting An Illegal Tax Shelter

Forbes

08-08-2025

The goal of an illegal tax shelter is typically to hide income. getty
A Colorado man has pleaded guilty to conspiring to defraud the United States and tax evasion related to his promotion and use of an illegal tax shelter. He also pleaded guilty to wire fraud related to his operation of a fraudulent investment scheme.
According to court documents, Timothy McPhee, of Estes Park, Colorado promoted a fraudulent tax shelter to taxpayers across the country. A tax shelter is a financial strategy used to reduce taxable income. Not all tax shelters are illegal—Iegal tax shelters include tax-favored accounts like retirement account. But illegal tax shelters—those created to generate unintended tax 'benefits'—are created for the purpose of evading tax.
The abusive tax shelter that McPhee touted was made up of a private family foundation and three trusts: a business trust, a family trust, and a charitable trust. The trusts were successively layered, meaning that each trust named the next trust in the series as its beneficiary. McPhee taught clients who purchased the tax shelter how to use the trusts and foundation to evade paying federal income taxes on nearly all their income.
More than two hundred taxpayers nationwide purchased the abusive tax shelter. These clients collectively sheltered approximately $159 million in income, which resulted in the underpayment of about $45 million in federal income taxes.
To carry out the abusive tax shelter, McPhee and his co-conspirators first instructed clients to restructure their business as a multi-member limited liability company (LLC), with 98% owned by a business trust and 2% personally owned by the client. The clients were told they could choose different percentages if they wanted, which essentially let them decide how much tax they paid. Although this restructuring appeared to give the impression that the clients had given up about 98% ownership of their business, they maintained full control over their operations, as if nothing had changed.
Under McPhee and his co-conspirators' direction, the clients would then report legitimate income and deductions on Form 1065 (partnership return) for the business and allocate 98% of the ordinary business income to their business trust via a Schedule K-1. The client would then report the remaining 2% of the ordinary business income on their Form 1040 and pay taxes on that income to avoid scrutiny from the IRS for paying no taxes.
Then, by filing a series of fraudulent Forms 1041 (trust returns), the clients would reduce the remaining 98% of their business income to $0 to avoid paying any taxes on that income. The Form 1041 for the business trust would report the 98% distribution from the LLC as income. This income would be offset by non-deductible personal expenses disguised as 'other deductions,' and any remaining income would be distributed to the beneficiary, i.e., the family trust, and deducted as an income distribution. As a result, the business trust would report $0 or less in taxable income.
The process was a rinse and repeat for both the family trust and charitable trust. Income was offset with non-deductible personal expenses disguised as 'other expenses,' and any remaining income was either distributed (for the family trust) or donated (for the charitable trust) to the next entity in the series.
The last piece was the so-called private family foundation. While private foundations can be legitimate entities, in this case, the clients never actually gave up control of the income they claimed to have 'donated' from the charitable trust to the private family foundation. For any given year, the clients who used the scheme paid no taxes on 98% of their ordinary business income.
To establish a paper trail supporting the scheme, McPhee and his co-conspirators instructed clients to sign trust documents claiming to create non-grantor trusts. They also directed clients to open bank accounts in the name of their trusts and private family foundation and to move funds between these accounts in the same way the money was transferred on the false tax returns. Although the false tax returns created the illusion that the client gave up control of 98% of his or her business income, the client maintained full control of that income and maintained complete control over their assets. Promotion
To promote the scheme, McPhee hosted seminars across the country. At the seminars, they distributed promotional materials that described the tax shelter, how to set it up, and how it worked to eliminate taxes owed. McPhee explained that clients could avoid paying taxes on up to 98% of their income by using the tax shelter. McPhee also assured the audience that the method he promoted was legitimate and legal.
McPhee often told prospective clients that they would 'own nothing, control everything' if they purchased and established the trusts. For example, McPhee explained that clients would not give up control of the money they 'donated' to their private family foundation because they could 'invest' that money or 'loan' it back to their business, business trust, or family trust tax-free.
McPhee also told clients that any money spent by the trust, including personal expenses, could be claimed as a tax deduction on the trust's tax return. McPhee and his co-conspirators also told clients that they could use their family trust to pay for personal expenses, such as weddings, suits, pools, and vacations—and they could be claimed as tax deductions.
McPhee personally did not sell the tax shelter for a fee. Instead, if a client wanted to purchase the shelter, McPhee referred the client to another co-conspirator. The cost? Typically $25,000 for three trusts and an additional $25,000 for the private family foundation. Other Professionals
To keep up the scheme, McPhee referred clients to handpicked bookkeepers and tax return preparers (at least two of whom were charged as co-conspirators). And, to encourage clients to purchase the abusive tax shelter, McPhee assured clients they would have a team of 'experts' in place to support them as they learned how to use the trusts and the foundation. Personal Use Of The Tax Shelter
McPhee also personally used the abusive tax shelter to hide more than $5 million in income from the IRS between 2016 and 2021. As a result, McPhee did not pay approximately $1.8 million in federal income taxes he owed during those years. Guilty Plea
In pleading guilty, McPhee acknowledged that he gave directions to clients that he knew directly contradicted IRS guidance and that he deliberately ignored warnings from accountants and attorneys that the tax shelter was fraudulent and illegal.
According to court documents, McPhee is represented by Ronald Gainor. Gainor did not immediately respond to a request for comment. Criminal Charges And Plea
McPhee pleaded guilty to one count of conspiracy to defraud the United States, one count of tax evasion, and one count of wire fraud.
Conspiracy charges mean that two or more persons agreed to commit a crime (in this case, defraud the United States) and the defendant joined, knowing the purpose of the scheme and intending to help accomplish that purpose. Court documents indicated that there were at least four other co-conspirators, including Larry Conner, Roderick Prescott, Suzanne Thompson, and Weldon Wulstein.
Tax evasion is the illegal and intentional act of underpaying or failing to pay taxes owed.
Wire fraud involves wire communication—in this case, the internet—sent across state lines to promote or commit fraud, while mail fraud involves the use of the U.S. Mail (or other mail carriers) to execute a scheme.
According to court documents, the tax loss for Count l is $43,993,900 and the tax loss for Count 15 is $1,863,634. The fraud loss, including relevant conduct, is $7,956,001. Those amounts will impact the sentencing. That's because the federal sentencing guidelines, established by the United States Sentencing Commission (USSC), requires the calculation of a base offense level (determined by the loss amount) which can be adjusted for factors like sophisticated means or criminal activity. Other factors may include any criminal history. Sentencing
Following his guilty plea, McPhee is scheduled to be sentenced on October 23. He faces a maximum penalty of five years in prison and a fine of $250,000 for conspiring to defraud the United States, a maximum penalty of five years in prison and a fine of $250,000 for tax evasion, and a maximum penalty of 20 years in prison and a fine of $250,000 for wire fraud. IRS Criminal Investigation
IRS Criminal Investigation (CI) and the FBI investigated the case. CI is the sixth-largest law enforcement agency in the U.S. and is the criminal investigative arm of the IRS, responsible for conducting financial crime investigations like tax fraud, narcotics trafficking, money laundering, public corruption, healthcare fraud, and identity theft. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, the IRS is the only federal agency that can investigate potential criminal violations of the tax code. The agency has 19 field offices located across the U.S. and 14 attaché posts abroad. Forbes Man Who Marketed Pablo Escobar-Branded Crypto And Flamethrower Pleads Guilty To Fraud By Kelly Phillips Erb Forbes Arizona Woman Will Go To Jail For Multi-Million Dollar Fraud Scheme Connected To North Korea By Kelly Phillips Erb