"You Can Legally Pay No Taxes for Life"... 'Tax-Saving Products' Draw High-Income Earners in Droves: What's Happening in the U.S.?

Fraud Targeting High-Income Earners Exploits Complex Tax Laws
Four Indicted for Hiding 2 Trillion Won Through Sham Trusts
Billions of Won in Nonexistent Tax Credits Sold to Investors

U.S. authorities are on high alert as fraudulent tax-avoidance schemes promising to let people defer taxes for life or pay nothing at all gain traction. Sophisticated schemes are spreading, including hiding trillions of won in income through sham trusts and selling tens of billions of won in fake tax credits that do not exist under federal tax law. Taxpayers who trust these schemes and buy into them now face the prospect of hefty back taxes and penalties.

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Four Charged with Hiding 2.007 Trillion Won Through 'Sham Trusts'

According to U.S. tax publication Tax Notes on November 12, the U.S. Department of Justice said on October 16 that it had indicted four Texas residents for allegedly selling illegal tax-avoidance products. They are accused of using sham trusts to help clients conceal more than $1.5 billion in income from federal income tax, equivalent to approximately KRW 2.007 trillion. The U.S. government estimates that the resulting tax revenue loss exceeds $200 million, or about KRW 267.6 billion.

The sellers lured clients with claims that this structure could effectively let them defer tax payments forever, while collecting hefty fees of up to $100,000 per transaction, or approximately KRW 133.8 million.

Selling 'Native American Tax Credits' That Do Not Exist in Law

Alongside the sham trusts, an audacious fraud involving the creation and sale of tax credits that do not exist under federal tax law has also come to light. The U.S. company White River Energy marketed so-called "Native American tax credits," claiming that the special legal status and sovereignty of Native American tribes allowed ordinary taxpayers to reduce their federal income taxes.

The sellers claimed to have secured $5.5 billion in tax credits and offered them to ordinary investors for 50% to 60% of their face value. For example, one fund manager bought $3.5 million in tax credits, worth approximately KRW 4.683 billion, for $2.165 million, or about KRW 2.897 billion, only to suffer a loss.

However, the Internal Revenue Service (IRS) made clear that the tax credits were fictitious and did not exist under federal tax law. Experts warn that taxpayers who buy such products risk not only losing their investment but also facing substantial penalties and interest on the taxes they originally owed.

Sellers Reap the Profits, Taxpayers Bear the Risks

These high-risk tax-evasion schemes persist because sellers can make enormous profits in a short time. Products related to White River Energy generated about $7 million in sales, or approximately KRW 9.4 billion, in just the first two weeks of 2024, and cumulative sales reached $15 million, or about KRW 20 billion, by that summer. The losses, meanwhile, fall entirely on taxpayers.

The fact that the IRS's oversight is not foolproof is also cited as a problem. According to an analysis by the Urban-Brookings Tax Policy Center, the audit rate for individual U.S. taxpayers was just 0.3% in tax year 2021, while the rate for corporations was 0.4%. Recent budget cuts and staffing shortages have further limited the agency's ability to detect complex, sophisticated tax fraud in real time.

Experts stress that typical red flags include tax credits offered at an excessively steep discount from face value, requests to sign a nondisclosure agreement before anything else, and sellers who cannot clearly explain the legal basis for a product. Even when promised tax savings, taxpayers should carefully verify that the benefits are actually permitted under tax law.

This content was produced with the assistance of AI translation services.