Tax Fraud Scheme Masks as Asset Protection

Legitimate asset protection planning is again tainted when a married couple, allegedly engaging in tax fraud, sells their fraud scheme under the guise of asset protection planning. It is a recurring theme. Schemes to hide assets offshore are frequently but incorrectly characterized as asset protection planning.

The Justice Department recently commenced a suit in the Southern District of Florida against the assumed perpetrators, Byron Denver Hatcher and his wife, Kim Reinhart, seeking to bar their presumptive criminal activities. The scheme appears to be one where the participant is advised to set up a series of trusts and corporations offshore and thereby avoid tax on the income from their lawful U.S. based businesses. It turns out that the offshore entities are mere shams and attempts to construct a subterfuge to hide the source of the income. The real business activities continue to be conducted in the U.S. and the income is clearly subject to U.S.tax.

The story is unfortunate because it links asset protection planning with a tax fraud scheme. Authentic asset protection planning does not involve hiding assets or income. To the contrary, asset protection planning is usually tax neutral with the client paying the same amount of tax he would have paid on his income had he not created the asset protection plan.

Clients considering asset protection planning are either under financial duress already or desire to be proactive and take steps today so that if they get into a financial crisis or encounter significant claims, a portion of their assets will be out of reach of their creditors. If the client does a little advanced research before coming into the asset protection planner’s office and sees that this area is frought with tax fraud issues and IRS criminal actions, it will be no surprise that the potential client decides to cancel his appointment. The sad part is that asset protection planning and tax fraud have nothing in common and the client should not be diverted from discussing and implementing legitimate strategies because of these rogue cases.

The government suit stated that “for Hatcher and Reinhart, the term ‘asset protection’ is a euphemism for ‘tax fraud’.” Hopefully those of us in the industry will continue to work hard to debunk this connection and educate the public that asset protection is a permissible form of planning and does not involve tax evasion.