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In the 1980s, the IRS was busy battling bogus tax shelters and the promoters who used them as get-rich-quick schemes — often leaving unwitting taxpayers in a jam. Nowadays, this kind of promoter is hawking what the IRS calls the “abusive trust.” The schemes are so new that the IRS has only been keeping statistics since 1998, but already more than 100 prosecutions have begun nationwide. According to Jerome D. Lisuzzo, the newly appointed head of the IRS’ criminal investigation field office in Philadelphia, lawyers can play a key role in preventing the schemes by making sure that their clients don’t fall victim to such promoters. “A significant portion of the American public doesn’t understand the mechanics of how a trust works and what exactly it does,” Lisuzzo said in a recent interview. “Combine that misunderstanding with a little bit of greed, and what you get is the perfect elixir for the charlatans who in the early ’80s might have hawked bogus tax shelters to unsuspecting individuals.” The promoters, he said, are hawking the trust as a perfect solution to the taxpayer’s problems by claiming they can be structured to drastically reduce or eliminate tax liability. But to the unsuspecting consumer, the short-term savings can lead to long-term grief, Lisuzzo said, because what the promoters are calling a trust is “actually a vehicle with no economic substance whatsoever.” Some of the warning signs, he said, are that the proposed “trust” is billed as a mechanism that allows the taxpayer to retain “full control” in his or her property even after placing it in a trust and the promise that the trust will “somehow magically convert personal expenses into legitimate deductible expenses.” The payoff for the promoter is all in the fees — for putting the trust together and administering it. Lisuzzo, who himself is a lawyer, said anyone approached by a trust promoter needs to “give it the sanity check” because “anything that looks too good to be true usually is too good to be true.” The classic abusive trust is a “layered affair,” Lisuzzo said, in which a business is placed into trust where the income it earns can be reduced by charging off “expenses” — such as rental of equipment the business actually owns or even fictitious expenses. The “beneficiary” of the trust is a second trust that deducts even more expenses, he said. The abusive trust is often “vertically layered,” he said, so that “by the time the income works its way through to the end, the taxpayer ends up with, instead of $200,000 in income, maybe only $20,000.” Often, Lisuzzo said, the structure of an abusive trust closely resembles money laundering and involves placing assets in foreign accounts in tax haven countries and later efforts to “repatriate” the money to the United States by using debit or credit cards. Lisuzzo said lawyers and taxpayers should watch for “red flags” of abusiveness, including the “layering” of the trusts, the “virtual elimination” of all tax liability and the promise that the taxpayer will “relinquish no control” over the assets placed in trust. Other red flags, he said, might be that the promoter doesn’t have the trappings of a professional — such as credentials and an office — but instead is operating from a post office box. Lisuzzo is the first lawyer to head Philadelphia’s IRS criminal division. A 1991 graduate of Wayne State University Law School in Detroit, Lisuzzo has been working with the IRS’ criminal investigation division since 1983. His first 11 years were in the field office in Detroit followed by two years in the national office working in the asset forfeiture section. From there, he moved to Virginia where he worked three years as a group supervisor, followed by two years in Chicago as an assistant chief. Now Lisuzzo heads an office that handles all criminal tax investigations for the eastern two-thirds of Pennsylvania. He oversees seven groups of special agents — five in Philadelphia, one in Harrisburg and one in Scranton. With 63 agents, Lisuzzo said the Philadelphia field office is “a little low” right now since each team is budgeted for about 10 agents. But the criminal investigation division of the IRS is dwarfed by the civil division, he said. Although the IRS employs about 100,000 nationwide, the criminal division has only about 3,000 employees. Recently, Lisuzzo said, the IRS restructured in several ways. Significantly, the criminal division’s field offices now have a “direct line chain of command” to the top criminal agents in Washington instead of going through the local civil chiefs. IRS agents have “exclusive jurisdiction” over crimes involving federal tax laws, he said, but also take part in investigating a wide variety of white-collar or financial crime investigations, as well as narcotics, gambling and health care frauds. “We employ what I think are uniformly considered to be the finest financial investigators in the world,” Lisuzzo said. When it comes to “following the paper trail” and ferreting out complex financial crimes, he said, “that’s something that we do better than any other agency out there.” In drug cases, Lisuzzo said, the IRS often helps to tie the kingpin to the drugs by linking him to the stream of cash. Sometimes, he said, the tax charges are “adjunct” to the drug charges, but in a few cases, the tax crimes are the only ones the government is able to prove. Like the mobster Al Capone, he said, a few criminals go down only on the tax charges that result from proving that they led a lavish lifestyle and had access to significant wealth that was never reported. Lisuzzo said the public doesn’t often realize IRS agents are full law enforcement officers, who, just like FBI agents, carry guns, go undercover, execute search warrants and make arrests.

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