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Forbes
6 days ago
- Business
- Forbes
Guilty Plea For Role In Directing And Promoting An Illegal Tax Shelter
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. 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CNBC
01-05-2025
- Business
- CNBC
How to get a mortgage if you're self-employed
Applying for a mortgage can be difficult, especially for people with nontraditional income sources, like self-employed workers, small business owners, gig workers, freelancers and anyone else who doesn't receive a W2 from an employer. "The typical mortgage broker has a checklist," Keith Hall, president and director of the National Association for the Self-Employed (NASE), told CNBC Select. "They want to see how long you've been at your existing job, as well as two years' worth of pay stubs." When you're self-employed, "your income isn't as even as someone who gets a regular paycheck," Hall added. So, self-employed workers must "paint a story" of their business and its future, he said, to assure lenders that they're creditworthy. Sole proprietors, independent contractors, partners in a business, gig workers or those who own a business part-time are all considered self-employed, according to the Internal Revenue Service. Generally, anyone who brings in income by doing work that's not documented on a W2, is considered self-employed. Most borrowers want to see that you've been self-employed for at least two years before they consider you for a mortgage. In addition to the documents that everyone needs to apply for a mortgage, such as bank statements and identification, self-employed applicants will also need to provide additional documentation to potential lenders. You'll need to show how you earn your income. You can do this by getting a letter from a certified public accountant, showing your business license or proof of business insurance. If you're a freelancer, a letter from a professional organization verifying your membership or a letter from a client will also suffice. Lenders also want to know as much as they can about the state of your business. You should provide them with bank records, profit-and-loss reports and cash-flow statements from the past two years. Hall said you may also want to include documents from your accounting software, such as QuickBooks. Lenders will also need to see your tax returns for the past two years as well as tax forms, relating to your business type — Schedule C for most LLCs and some sole proprietorships, Form 1065 for general partnerships and Form 1120 for C Corporations or S Corporations. You'll make a stronger case if you can show that your business is expected to grow, Hall said. So bring your business plans for the next few years. You can reach out to a self-employment or small business expert through NASE, the Small Business Administration or the Internal Revenue Service to ensure you have everything you need for your mortgage application. If you're self-employed or have unpredictable income, you'll have a better chance of being approved for a non-qualifying mortgage (non-QM), home loans that have have more flexible terms and accept non-traditional income sources. Examples of non-QM loans for self-employed borrowers include: Bank statement loan: A bank will consider your mortgage application based on your bank statements for the past two years rather than your income tax forms, such as a W-2. Profit-and-loss loans: A bank will consider your mortgage application based on your business' profit-and-loss statements rather than your income tax forms, such as a W-2. Investor cash flow loans: Also known as a debt service coverage ratio (DSCR) loan, this type of mortgage is specifically for real estate investors. A bank will consider your mortgage based on your rental analysis, rather than income or even employment verification. CrossCountry Mortgage offers all three, as well as several down payment assistance programs. Fixed-rate and adjustable-rate available, apply online for rates. Conventional loans, FHA loans, VA loans, USDA loans, Jumbo loans, manufactured home loans Apply online for terms 620 for conventional loans, 500 to 580 for some government-insured loans 3% New American Funding also provides non-QM loans to self-employed applicants. Borrowers can qualify using bank statements, profit and loss statements or tax returns. Apply online for rates. Conventional, FHA, USDA, VA, jumbo, refinancing, home equity loan, reverse mortgage 10- and 30-year fixed-rate terms and various adjustable-rate terms 620 0% for VA or USDA loans, 3% for conventional, 3.5% for FHA If you're worried a lender will take one look at your financials and reject your application, there are steps you can take to increase your chances. Local banks are much more likely to provide loans to local small business owners, Hall said. "The smaller community banks are more involved in the community," he said. "If you're operating a plumbing operation or a small restaurant, there's a reasonable chance that a banker has been to your restaurant. They're more familiar with the community." Lenders consider an applicant a safer bet if they make a larger down payment and have more savings in reserve. This shows lenders you have steady income and a lot of cash savings. The average down payment for first-time homebuyers is 9%. If you don't have a lot saved, consider down payment assistance programs. You can also make yourself a more attractive applicant by raising your credit score. Most lenders require a credit score of 620 for a conventional mortgage, but borrowers with a score of 760 or higher typically get the best rates. All three credit bureaus — Experian, Equifax and TransUnion — consider payment history, debt repayment and your credit utilization rate when determining your rate. By making on-time payments, paying off debts in full, catching errors on your credit report and keeping your credit utilization under 10%, you can significantly improve your credit score in a short amount of time. Separate your work and personal life — that goes for your finances, too. This makes it simpler for lenders to assess your business income and your personal finances. According to the Small Business Administration, you can do this by opening a business bank account, getting a Data Universal Numbering System number (which allows you to build credit for your business) and getting a business credit card. If all else fails, you may want to ask a loved one to cosign a loan with you. This means they promise to pay the lender if you fail to make the payment. Being a co-signer is risky and consequential. A cosigner is responsible for repayment but does not own a portion of the house. It also impacts the cosigner's credit score. Yes, but it will require additional paperwork, including financial documents, tax documents and future business plans. Typically, you should be able to show two years of steady work or self-employed income to be considered for a mortgage. Yes, getting a home loan as a self-employed person can be more difficult. However, there are banks that provide non-qualifying mortgages that don't require W2s. Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here. At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
Associated Press
13-02-2025
- Business
- Associated Press
Key Business Tax Deadlines Approaching: ExpressExtension Helps Tax Professionals File Extensions with Ease
With March 17 tax deadlines approaching, ExpressExtension offers a secure IRS-authorized solution for filing business tax extensions with Forms 7004, 4868, 8868, and 8809. ROCK HILL, SC / ACCESS Newswire / February 13, 2025 / With the January 31 deadline for Forms 1099 and W-2 behind them, tax professionals now turn their attention to the next set of critical business tax deadlines. Among the most significant are Form 1120-S, Form 1065, 1042, and 1042-S, all due on March 17, 2025. For businesses and tax professionals who need more time to prepare returns, the IRS allows an extension request using Form 7004, postponing the filing deadline. However, this extension applies only to the return itself - any taxes owed must still be paid by the original deadline. ExpressExtension, an IRS-authorized e-file provider, simplifies the extension filing process, providing a secure and efficient solution for businesses and tax professionals. ExpressExtension - A Comprehensive Solution for Tax Extension Filing ExpressExtension supports the following tax extension forms for the 2024 tax year. Form 7004 This form is used to request a 6-month automatic extension for business tax returns, including Form 1120-S (S corporations) & Form 1065 (partnerships). With a deadline coming up for S corporations and partnerships on March 17, 2025, tax professionals can file Form 7004 to extend the filing deadline to September 15, 2025. Form 4868 Filing Form 4868 provides an automatic extension for individual income tax returns, including Form 1040 & 1040-NR. Individuals can extend their federal filing deadline from April 15 to October 15, giving them additional time to prepare and submit their returns. Form 8809 This form is used to request an extension for filing information returns, including Form 1099-series, W-2, 1042-S, and 5498. Filing 8809 grants an automatic 30-day extension for reporting payments made to foreign individuals and entities. Form 8868 Form 8868 grants an extension for tax-exempt organizations filing 990 series returns, including Form 990, 990-EZ, and 990-PF. Filing 8868 allows nonprofits and tax-exempt organizations more time to gather the required financial information before filing. PRO Features Tailored Exclusively for Tax Professionals ExpressExtension offers exclusive features designed specifically for tax professionals, making the extension filing process simpler and more efficient. Intuitive Dashboard for Seamless Management The ExpressExtension dashboard provides a centralized hub for tax professionals to efficiently manage extensions, track filing statuses, and access past filings. With real-time updates and a user-friendly interface, tax professionals can stay organized and ensure every extension request is processed accurately. Secure Bulk Upload Options ExpressExtension offers a quick and efficient way to add client business details manually or add all the required clients at once with the provided bulk upload templates. ExpressExtension offers the Express Guarantee for Forms 7004 and 4868. Under this guarantee, clients can receive a full refund of the payment if the IRS rejects these forms due to duplicate filing. If the extension forms are rejected for other reasons, tax pros can fix errors and retransmit the returns at no additional cost. Volume-Based Pricing Tax professionals can choose to pay per extension or purchase credits in advance at discounted volume-based rates. World-Class Customer Support ExpressExtension provides reliable customer support via phone, email, and live chat, ensuring tax professionals receive assistance whenever needed. AI Assistance At Every Step ExpressExtension's AI-powered chatbot provides instant answers to common questions, guiding tax professionals through the extension filing process. Visit and start e-filing Form 7004, 4868, 8868, & 8809 at an affordable price. About ExpressExtension ExpressExtension is the one-stop solution for IRS Tax Extensions. As an IRS-authorized, SOC 2 Certified e-file provider, ExpressExtension has been helping businesses, tax professionals, individuals, and non-profit organizations obtain IRS extensions for over a decade. Supported forms include Form 7004, 4868, 8868, and 8809. About SPAN Enterprises Headquartered in Rock Hill, South Carolina, SPAN has been developing industry-leading software tools for e-filing and business management tools for over a decade. The SPAN Enterprises Portfolio of products includes TaxBandits, Tax 990, ACAwise, ExpressExtension, 123PayStubs, and TruckLogics. [email protected].
