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Ecuador Tax Fraud

Do not go to Ecuador and accidentally commit tax fraud.

We have seen a huge growth of readers moving to Ecuador in the past ten years.  Such growing crowds attract crooks and thieves.

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Delegates at our courses love meeting one another and they learn a lot in their informal social talks. Here are delegates in the courtyard of Inn Land of the Sun (formerly Meson de las Flores) at lunch and…

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dinner.

However one always has to double check what is learned.

Tourists are vulnerable to pickpockets in the markets… but there are greater risks from other westerners who have moved to Ecuador and run businesses that range from unethical to outright fraudulent. In fact we have had to ban a several unethical gringos from the hotel because they sell real estate at inflated costs using high pressure.

In a moment we’ll have a link to see tips on how to know when an investment or piece of real estate seems too good to be true.

Here let’s  look specifically at a fraud that can lead you astray with the tax man and could even end up putting you in jail.

Recent messages about filing US tax while you live in Ecuador or abroad evoked a number of replies like this:

Mr. Scott, Your comments on the US income tax are incorrect.  I suggest you visit, (website deleted)  and order a copy of the book, (book name deleted) one of the most important books ever written.

Another reader wrote:  I spent a couple of decades studying the research of various individuals and organizations who had deconstructed the tax laws.
I normally don’t share this information with too many individuals as my experience has shown that no matter how much people gripe about this illegal tax, they don’t have the balls to file in this manner.  I have sent you this as I think it would interest you, whether or not you ever utilize it. If you seek advice from a lawyer or accountant on this topic they will think you have lost it as they are part of the system and are heavily indoctrinated.   Years after I instituted this way of filing I came across similar information that came form an American who had a solid background of military and intelligence service and at the time was a businessman. A woman high up in the IRS told him it was unnecessary to pay income tax and showed him how to do it after he had done a significant favour for her.  He started utilizing it and has been successfully doing it ever since… a period of more than 25 years.

Another sent this:  Hey Gary,,,Why don’t change over from a U.S. citizen to a Sovergein Citizen of the U.S.A. &/OR a citizen of NC, or Florida?!? The benefits are enormous! OR, Better yet; form an International Organization, Exchange Et Al into it and have too little “Income” to pay any
Tax?????

The gist of these and other emails is that there are simple, magical ways to eliminate paying tax forever.  Don’t believe this!

I have been getting this kind of information sent to me from readers for at least 20 years. The idea comes in a variety of themes such as income tax is illegal and does not have to be paid.  Some say income tax is a voluntary tax.  Others tell that there are ways to create pure trust or constitutional trusts that do not have to pay tax.  And still others say that there are assorted other ways to deconstruct tax laws.   A lot of this is out there and it is scary.

I really worry about readers who believe this stuff and in a moment will explain why.

First let me share just a few of the previous messages from this site on this subject.

In the early 200os I asked my friend and tax attorney Joe Cox to confirm what I thought about the “Pure Trust” concept.

Here is Joe’s reply:  “Gary, the pure trust is a scam and a fraud.  Some people who sold it just went to jail. I would advise all to never even consider it.  However, I enjoy looking at this stuff just to see how bad people can be.  I just spoke to the IRS criminal division last week on this issue, our good friend, whom you know Aaron, now works for them.”

Joe Cox can be reached  at jcox@coxnici.com

Another great attorney who specializes in legitimate trusts that are legal and do work is Richard Duke and his email address is richard@assetlaw.com

Richard sent me this news article clear back in 2003 about one of the first promoters of a “no tax scheme” books.

“DOJ Seeks Restraining Order Against Notorious Tax Scheme Promoter”

“We have zero tolerance for those who make a living selling tax-scheme packages that falsely promise zero tax liability,” said Eileen O’Connor, Assistant Attorney General in charge of the Justice Department’s Tax Division, in a press release dated March 13, 2003. The statement was made in connection with a recently filed complaint against Irwin Schiff and his colleagues, in which the DOJ asked a Nevada District Court to issue injunctive relief to stop the defendants from selling or providing tax advice or return preparation.

“The defendants conducted business through an entity located in Nevada called Freedom Books, as well as through Internet sites. The complaint alleges that the defendants marketed tax-avoidance schemes to taxpayers purporting to exempt their income from taxation and advised them on how to frustrate governmental efforts to ascertain their true tax liabilities and collect any deficiencies.

“Schiff, twice convicted of tax-related crimes in the mid-70s, has been promoting abusive tax-schemes for the last 25 years and has admitted that he has not made any voluntary federal income tax payments for 30 years, despite having generated substantial income from promoting tax schemes and preparing returns.

“According to the complaint, the IRS estimates that, based on Schiff’ s3,100 identified clients, his customers have evaded or have attempted to evade roughly $56 million in income taxes from 1999 to 2001. However, Schiff has been actively marketing his tax schemes since 1994, suggesting that the actual loss of revenue may be much higher. According to the complaint, his adherents, several of whom have been convicted of tax crimes for following his frivolous theories, may actually number in excess of a million.

“The proliferation of Schiff’s positions has been the product of mass-marketing efforts on local and national radio and television informercials in which he outlines his “zero income” strategy. Schiff also offers an instructional video, seminars and $300 per-hour one-on-one consultations.

“The release also states that over the last two years the DOJ has sought injunctions against 32 promoters and has been successful in every case decided so far. The DOJ’s move reflects the administration’s policy of cracking down on abusive tax schemes across the country. And, with the IRS and Treasury having recently finalized the tax shelter disclosure regulations, it appears as though the government is putting its foot down hard. “We plan to go after many more [tax schemes] and will continue pursuing tax promoters until the problem is solved,” said O’Connor.

This is serious stuff. One reader believed what he learned at a restaurant and sent a letter to the IRS telling them that he would not pay tax until they proved it was constitutional.  For years they left him alone and he thought he had beat them.  Then one day they came. He was arrested… indicted and tried for tax evasion.  During the trial, this reader testified that he was not a U.S. citizen for purposes of federal income taxes but was a US citizen for all other purposes including carrying a passport and registering to vote.  He testified that he was not required to pay income taxes and that the income tax on wages was unconstitutional. He testified that he attended a meeting at a restaurant where he met people who taught him these anti-tax ideas.

He was convinced that the jury would agree with him.  It took them just hours to find him guilty and he was sentenced to 36 months imprisonment, followed by three years supervised release, on three counts of tax evasion.

Here is the point.  The people who offer these tax avoidance theories may be correct or not from a theoretical point of view. One can argue abstract law till the cows come home, but theory does not mean much in court. Precedence is what counts. Many of us have very ill feelings for the tactics of the IRS, but this guy spent time in jail and was heavily fined.  He also has lost his right to practice medicine.

Morally right or wrong, from a practical point of view if you use these types of schemes, you run the risk of being heavily fined and/or jailed.  Living outside the US does not exempt Americans from tax and/or the need to file if you have income.

The excerpt below from a USA Today article entitled “Debunking common tax myths” by Sandra Block reinforces this fact:  In 1913, you could have carried a copy of the CCH Standard Federal Tax Reporter, an annual compilation of U.S. tax law, in your briefcase. Today, you’d need a wheelbarrow. The 2010 publication contains more than 71,600 pages and will probably grow even fatter in 2011.

As the tax system has grown increasingly complex and convoluted, myths about the tax code and the inner workings of the IRS have multiplied. Some popular misconceptions could cause you to pay more money than you owe or delay your refund. Others could trigger an audit. And some could land you in jail.

Myth 9: Wages aren’t taxable income

Proponents of this view, sometimes referred to as the “861 argument,” contend that a provision in the tax code excludes income from U.S. sources earned by U.S. citizens from federal taxes. The IRS says this premise is based on a misreading of the tax code. In 2008, a federal court sentenced actor Wesley Snipes, an adherent of the Section 861 position, to three years in prison for failing to file tax returns. (Snipes has appealed the sentence.)

Myth 10: Paying taxes is voluntary

In the instruction book for Form 1040, the IRS states that the tax system is voluntary. That has led some tax protesters to claim that filing a tax return or paying taxes is a matter of personal choice.

But according to the IRS, the term “voluntary” refers to our system of allowing taxpayers to determine how much they owe and fill out the appropriate forms, instead of receiving a bill upfront from the government. Filing a tax return isn’t voluntary, and neither is paying your taxes, the IRS says. The IRS’ position has been upheld by numerous court rulings, and several individuals who promoted the notion that taxes are voluntary have gone to jail.

A variation on this theme is that taxes are unconstitutional, or that the IRS doesn’t have the authority to enforce the Internal Revenue Code. Last week, Kenneth William Wells, 52, of Happy Valley, Ore., pleaded guilty in federal district court to one count of tax evasion for, among other things, promoting tax-avoidance schemes based on these arguments. Wells, who was charged with evading $185,000 in taxes, interest and penalties, faces up to five years in prison and a $250,000 fine.

The IRS takes a dim view of tax returns that contain what it calls “frivolous arguments” — generally, the view that the taxpayer isn’t required to pay taxes. The penalty for filing a frivolous return is $5,000.

“The bottom line,” Lemons says, “is that there’s no secret way out of paying your taxes.”

Living outside the country of your nationality often brings some really great tax benefits. Learn all the good legal benefits and use them as much as you can.  However beware of tax frauds and those who might mislead you into tax evasion (which may be criminal) rather than legal tax avoidance.

Gary

P.S. Hiding money abroad is very risky as well.  The 2001 “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct  Terrorism (USA PATRIOT) Act”  though specifically designed to attack money laundering by terrorists, potentially provides the U.S. Treasury Department with substantial powers to obtain information identifying true beneficial owners of both U.S. and offshore bank accounts, among many other related issues.

Now the new H.I.R.E. overseas banking regulations enhance the government’s ability to force overseas banks to reveal data about US customers.

We’ll review these new H.I.R.E regulations at Jyske Bank’s seminar In California this April 30th to May 2nd.

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Get more details and also see how to spot investment fraud. Click here.

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Read the entire article Debunking common tax myths by Sandra Block reinforces this fact