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IRS Warning: Employee Leasing Abusive Scheme
Headliner Volume 33
December 11, 2002
The Internal Revenue Service is cautioning medical professionals
that promoters of abusive tax schemes are targeting them. This article
is to make medical professionals aware of a potentially abusive
A Typical Abusive Arrangement
Promoter's Pitch: Gain asset protection by concealing assets and
operating free from U.S.
tax law using the following: Offshore Entities, Employee Leasing
Companies, Deferred Compensation.
Actually in substance the professional:
- Retains the same employer
- Performs the same services
- Retains the same compensation
The typical arrangement may have a medical professional resign
from his present employer or personal professional corporation to
sign an employment contract with a foreign employee leasing company
giving it exclusive rights to his services. The leasing company,
through the use of one or more entities, indirectly leases the professional's
services back to his original employer. The professional performs
the same services before and after entering into the leasing arrangement.
The medical professional determines the amount of prior compensation
to be received as current salary and elects to defer the remainder
under a nonqualified deferred compensation plan maintained by the
leasing company. The leasing company may or may not transfer the
deferred amounts to an offshore trust. Because the original employer
is told it is making a lease payment rather than paying wages, it
pays no employment taxes. Consequently, the employer's portion of
employment taxes on the professional's salary may not be paid.
The professional reports and pays taxes on the annual salary received,
but income and employment taxes are generally not paid on the amounts
transferred offshore. These arrangements are promoted as a legal
way for medical professionals to "protect" their hard-earned assets.
Numerous cases have been litigated in which substance rather than
form determines tax treatment. In the arrangement described above,
the form of the transaction has changed, but the substance has not.
Notwithstanding promoters' claims that these arrangements are effective,
they could give rise to current income and employment tax liabilities
under the Internal Revenue Code and numerous tax law doctrines.
Additionally, participation in such an arrangement could subject
participants to civil and criminal penalties.
Moreover, if the original employer contributes to a qualified retirement
plan on behalf of the professional after he begins participation
in an arrangement such as the one described above, the special tax
treatment afforded the qualified retirement plan and its participants
could be jeopardized.
The Criminal Investigation Division of the Internal Revenue Service
has been actively and successfully prosecuting participants in and
promoters of abusive tax schemes. Audits involving arrangements
like the one described above are increasing. Before becoming involved
in one of these arrangements, the Internal Revenue Service recommends
asking the following questions:
- Is the arrangement designed to "hide" income?
- Is the arrangement designed to evade income
or employment taxes?
- Is the arrangement just too good to be
Be careful - answering "yes," or even "maybe" to any of these questions
can lead to severe consequences. The Internal Revenue Service suggests
that professionals considering involvement in an arrangement like
the one described above obtain expert advice from a competent tax
advisor not involved in selling the arrangement. Do not rely on
legal opinions obtained or provided by the arrangement's promoter.
Countless variations of these arrangements are being marketed to
medical professionals. Just because a promoter's arrangement is
not identical to the one described above does not mean that it is
outside the scope of this article.
For further information about recent court cases and tax law involving
abusive trusts and employment tax fraud, visit the Criminal
Investigation web site or the IRS
If you have specific questions on a tax scheme or wish to report
a possible scheme, call 1-866-775-7474 or send
an e-mail to: firstname.lastname@example.org.
- Offshore Employee Leasing
(a/k/a "Irish Employee Leasing" or "Barbados Employee Leasing")
A complex arrangement that attempts to utilize favorable
tax treaties (usually with Ireland or Barbados) to facilitate
(Step 1) a U.S. professional's self-firing from his U.S. company,
(Step 2) being re-hired by a foreign employee leasing company,
(Step 3) being leased back to his own U.S. Company, and (Step
4) deferring a portion of his income in the foreign jurisdiction.
Widely marketed throughout the United States, primarily by David
Tedder (now a convicted felon) and certain professionals with
whom he came into contact, those schemes are now being challenged
by the IRS, and in a few particularly abusive cases there have
convictions for felony tax evasion.
NEW! - United
States of America v. David H. Tedder (June 2004)
NEW! - Utah
Federal Court Bars Nationwide "Employee Leasing" Tax Scam
Utah-Based Financial Planners Must Disclose Customers' Names (December
NEW! - Red
Bluff Man Sentenced in Massive Tax Fraud Conspiracy and Investment
Fraud Scheme Case involves transfers of millions of
dollars to coporations, trusts and bank accounts in Ireland, the
Bahamas, Gilbraltar and the Isle of Jersey.