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In 2008, Wesley Snipes was convicted on three misdemeanor counts of willfully failing to file federal income tax returns and was sentenced to three years in prison. The conviction stemmed from his involvement in a tax evasion scheme promoted by American tax protestor Eddie Ray Kahn and accountant Douglas P. Rosile, who both claimed that paying federal taxes was voluntary. From 1999 through 2001, Snipes avoided $7 million in taxes by following their concept.
During his trial, Snipes argued that he was misled by Kahn and Rosile, claiming that he sincerely believed their false arguments that income taxes were not required by law. Kahn’s organization, American Rights Litigators, promoted flawed legal theories — Snipes’ defense was that he was acting on advice from “experts”, making him a victim of their fraudulent scheme.
Although he was acquitted of felony tax fraud charges, Snipes was convicted of willfully failing to file tax returns for several years. The court ruled that Snipes knew or should have known better, especially given the wealth of information available to high-income individuals about their tax obligations. Snipes later reflected:
“I made decisions. I accept the ramifications of those decisions. No one forced me to take that person as my accountant; no one forced me to take that person as my lawyer. No one forced me to believe what they were saying. That was on me. I don’t have time to sit back and say I was wronged and recapture all that was lost.”
Scams Targeting High-Income Filers
While Snipes is a complex, high-profile example, he is far from alone. If you’re a high-income earner, your success has made you a prime target for every scam artist with internet access. Here are examples of a few scams that target high-income taxpayers:
Improper Art Donation Deductions
How They Work: You purchase a piece of art for a certain price and later decide to donate it to a museum or charity. Normally, you’d get a tax deduction based on the fair market value of the artwork at the time of donation, but it needs to be properly appraised and documented. For high-value items, this deduction can be quite significant, and it allows you to support a cause while getting a tax break.
How Scammers Exploit It: Scammers exploit this situation by luring high-income individuals into inflating the value of their art donations. They charge high fees for their “services,” which often include using questionable appraisers to claim a much higher value than what the art is actually worth. By inflating the appraisal, you might be able to claim an oversized tax deduction that doesn’t match the actual value of the donation. The IRS sees this as an abusive tax strategy, and when caught, it can lead to:
IRS audits and penalties for falsely inflating deductions.
Disallowed deductions, meaning you could owe back taxes and face fines for trying to claim more than what was legally allowed.
Art donations can help reduce your taxable income while supporting charity, but you must follow IRS rules closely, using certified appraisers and ensuring all documentation is accurate to avoid falling into fraudulent schemes.
Charitable Remainder Annuity Trusts (CRAT): A Generous Plan with Complex Rules
How CRATs Work: A Charitable Remainder Annuity Trust is a type of irrevocable trust designed to provide a fixed annual income stream to the donor or other beneficiaries for a certain period of time, with the remaining assets going to a designated charity when the trust ends. It’s a great way to support a cause while receiving financial benefits, such as:
Income tax deduction based on the estimated value of the remainder that will eventually go to charity.
Defer capital gains taxes on assets sold within the trust, since the CRAT itself doesn’t pay those taxes.
Estate tax reduction as the assets transferred into the CRAT are removed from your taxable estate.
How Scammers Exploit It: Scammers often exploit the complexity of CRATs by posing as experts who offer to set up and manage the trust for you, promising to “maximize” your tax benefits. They may structure the CRAT improperly, divert funds for personal gain, or inflate the expected charitable donation value to create larger deductions. This can lead to:
Incorrect tax filings, which could result in audits, penalties, or disallowed deductions by the IRS.
Mismanagement of trust assets, where your intended charitable donation never materializes, or worse, your funds are siphoned off.
CRATs can be a smart tool for combining philanthropy with financial benefits, but they require careful management. Always work with an attorney with a proven track record in estate planning and charitable giving to avoid falling victim to CRAT scams.
Monetized Installment Sales
How Monetized Installment Sales Work: You sell something valuable, like a house or business. Normally, you’d have to pay a large tax bill right after the sale because you made a profit. But with a Monetized Installment Sale, you sell the property and agree to get paid in smaller chunks over time, which delays when you owe the taxes. Then, to get most of the money upfront (instead of waiting for the payments), you take out a loan based on the future payments. This way, you get the cash now and delay paying taxes until the payments come in.
How Scammers Exploit It: Scammers target high-income individuals by offering monetized installment sales as a way to completely avoid capital gains taxes, not just defer them. They may promise that no tax will ever be due, but this is a misrepresentation of how the law works. The IRS considers these schemes abusive when they are structured to delay the recognition of gain indefinitely. This can lead to:
IRS audits and penalties for improperly deferring capital gains taxes.
Loss of funds if the arrangement involves unregulated third parties or complex loan structures that fail, leaving the seller without their money or with additional debts.
In legitimate cases, monetized installment sales can be a useful tool for tax deferral, but they should always be handled by reputable tax professionals with a clear understanding of the rules. Misuse of this strategy can lead to serious legal and financial consequences.
Other Scams You Could Be Exposed To
As a high-income earner, you’re not just a target for tax scams like those mentioned above. You are all at increased risk of phishing schemes, fake charities, ghost tax preparers, and social media tax scams.
How Paley & Prehn Can Help You
Whether you need help setting up a trust, managing your estate, or navigating complex tax issues, we bring years of experience to help you make sound decisions. Our team provides personalized legal advice to ensure your tax strategies are compliant and your wealth is secure.