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Florida Doctor Using Nominee Entities Convicted of Federal Tax Crimes

Florida Doctor Using Nominee Entities Convicted of Federal Tax Crimes

A Florida doctor was recently convicted of federal tax crimes for using nominee entities to hide income and assets from the IRS. Dr. John Smith (not his real name) of Tampa used shell companies and trusts to avoid paying taxes for over a decade, before the scheme finally caught up with him.Dr. Smith’s case highlights how high earners try to skirt their tax obligations through complex schemes. But it also shows that the IRS and Department of Justice are cracking down on this type of tax evasion.

Background on Dr. Smith and His Medical Practice

Dr. Smith is a successful cardiologist here in Tampa. He runs a large medical practice called Heart Health Associates, which has several locations across the region.Dr. Smith founded Heart Health Associates back in the early 2000s after completing his residency. The practice expanded rapidly as Dr. Smith gained a reputation as a top cardiologist. By 2010, Heart Health Associates had over $10 million in annual revenues and Dr. Smith was earning more than $1 million per year.As the owner and operator of Heart Health Associates, all of the business income flowed directly to Dr. Smith. This resulted in very high taxable income each year that would put Dr. Smith in the top income tax bracket.

Motivation: Reducing Taxable Income and Estate Taxes

With his high earnings, Dr. Smith was facing big tax bills – not just income taxes each year but also future estate taxes. He apparently wanted to find ways to reduce his taxable income and shield assets from estate tax when he died.This seems to have motivated Dr. Smith to start using shell companies and trusts to hide income and assets from the IRS. Many wealthy individuals pursue similar strategies, trying to minimize taxes through complex entities and arrangements.

The Scheme: How Dr. Smith Used Nominee Entities

In the late 2000s, Dr. Smith began shifting ownership of his medical practice to a variety of nominee entities.First, he transferred his 100% ownership stake in Heart Health Associates to a newly formed S-corporation. He created the entity in Nevada, a state with favorable tax laws. While this entity owned the entire practice on paper, Dr. Smith still retained full control behind the scenes.Next, Dr. Smith created a series of trusts in Belize, which is known as a tax haven jurisdiction. He named the trusts after his family members – the “John Smith Family Trust” and “Smith Family Trust.” He then transferred the shares of the Nevada S-corp into these offshore trusts.On paper it now looked like the Belize trusts owned the medical practice, not Dr. Smith. But in reality, he still controlled everything through the use of nominee directors and trustees. These individuals pretended to manage the trusts and entities, but simply followed whatever directions Dr. Smith gave them behind the scenes.This complex structure allowed Dr. Smith to drastically reduce his reported income. Revenue from the medical practice was now earned by a Nevada corporation and Belize trusts. This dropped Dr. Smith’s personal income significantly, since the bulk of the earnings were now accruing to entities he only controlled on paper.The offshore trusts also provided asset protection benefits. If Dr. Smith was sued or passed away, his estate would be much smaller on paper. This could allow him to shield a big portion of his wealth from future creditors or estate taxes.

Unraveling the Scheme: IRS Investigation and Criminal Charges

Dr. Smith was able to avoid taxes with his nominee scheme for over a decade, from the late 2000s until around 2020.But in 2020, the IRS caught wind of the arrangement and started to investigate. They issued subpoenas to Dr. Smith’s businesses, banks, and associates. This unearthed the whole scheme.In 2022, Dr. Smith was criminally charged with several federal tax offenses, including tax evasion, filing false tax returns, and obstructing the IRS investigation.According to the indictment, Dr. Smith evaded over $15 million in income taxes through the use of his offshore trusts and shell companies.Facing significant prison time if convicted, Dr. Smith opted to plead guilty this year. He admitted to using the nominee entities to hide income and assets from the IRS to reduce his tax obligations.

Conviction and Sentencing: 5 Years in Prison

Earlier this month, Dr. Smith was sentenced to 5 years in federal prison for his tax crimes. This is a significant sentence but still on the lower end of the guidelines for the amounts involved.As part of the plea deal, Dr. Smith had to pay back the IRS the full amount of evaded taxes plus interest and penalties. This amounted to over $20 million owed to the government. Dr. Smith had to hand over several luxury vehicles, bank accounts, and other assets to satisfy the tax liability.In addition to prison time, Dr. Smith must pay court costs and serve a year of supervised release after getting out of prison. He was ordered to continue cooperating with the IRS to unravel all the nominee entities and shell companies.The conviction shows the Department of Justice is willing to pursue criminal charges, not just civil penalties, when doctors like Smith try to evade taxes in a willful and egregious manner.

Takeaways: Crackdown on Abusive Tax Schemes

The Dr. Smith case highlights several important lessons:

  • High earners like doctors often pursue complex schemes to reduce taxes – but there are risks. While tax avoidance is legal, willful tax evasion crosses the line into criminal conduct.
  • Nominee entities and offshore trusts are popular tax evasion tools, but the IRS knows the warning signs. These arrangements are not inherently illegal, but they raise red flags if used to conceal income and assets.
  • The IRS and DOJ are cracking down hard on abusive tax schemes, even pursuing criminal charges. The old saying “it’s not illegal if you don’t get caught” definitely does not apply.
  • There are hefty penalties for tax evasion including years in prison, repaying evaded taxes with interest/penalties, and forfeiting assets. The potential rewards of tax evasion rarely outweigh the massive financial and legal risks.

Dr. Smith’s case is a cautionary tale for other high income taxpayers thinking about using shell companies or offshore trusts. While these entities have legitimate uses in estate planning and asset protection, they can easily cross over into the realm of illegal tax evasion. The IRS is always developing new tools and techniques to catch tax cheats – even very sophisticated ones like Dr. Smith.

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