The IRS has a massive effort, launched in coordination with the U.S. Department of Justice, to identify and prosecute tax evaders from the medical profession.


Watch Out for Sham Trusts

The IRS is warning physicians not to get caught up in "too good to be true" tax schemes that consist of sham transactions lacking economic substance.

In recent years, the IRS has detected promotions involving abusive trust schemes that specifically target medical professionals. Multilayered trusts, in combination with other business forms, are used to conceal the participant's control over the trusts and his or her assets. "The goal of this layered distribution of income is to gradually reduce or eliminate taxable income through the use of bogus deductions and offshore diversions of income," the IRS explains.

Tax avoidance versus tax evasion:Legitimate, legal trusts are often used in estate planning and charitable transfers of property. But they are different from abusive, offshore trusts. U.S. citizens are taxed on worldwide income, no matter where it is kept.

When examining a trust, the IRS advises, determine who is spending and controlling the income and assets. In abusive schemes, the income and assets are controlled no differently than if the taxpayer had never formed a trust. "In other words," the IRS notes, "at the end of the business day, you are in the same position as you were before -- you still control the assets."

As part of the program, the IRS will initiate criminal investigations and audit thousands of health care providers. Many of the criminal cases stem from investments in fraudulent tax shelter schemes. To illustrate the cases the IRS has encountered, the tax agency and the Justice Department cited these examples:

    • A physician from Cleveland, Ohio, was sentenced in 2004 to two years in prison and ordered to pay over $330,000 in restitution to Medicare and Medicaid after pleading guilty to mail, health care and tax fraud. He was cited for concealing income in a sham corporation; falsifying federal tax returns to evade paying back taxes; and fraudulently reporting income on the returns of other taxpayers. Over a three-year period, the doctor billed Medicare and Medicaid for house calls he did not perform; charged higher private house call rates when he visited patients in group homes or had them come to his home; and charged for visits performed by an unlicensed person.

    • A doctor was sentenced in Missoula, Montana, to 18 months in prison for tax evasion. He entered into a plea in 2003 admitting that he concealed, or attempted to conceal, from the IRS his income and assets by placing them into a sham corporation.
    • A California ear, nose and throat specialist, along with two other physicians, entered a plea of guilty to conspiring to defraud the United States and filing false tax returns. According to the indictment in federal court, the doctors became clients of a Utah trust promoter. The three physicians, along with others, used trusts in an elaborate scheme to funnel income into and out of domestic and offshore bank accounts, and conceal income from the IRS. In 2002, the ENT doctor received a 24-month prison term, followed by three years of supervised release. The doctor was ordered to pay fines, restitution to the IRS and prosecution costs, as well as back taxes, interest and penalties.

    • A Michigan physician was sentenced to 15 months in prison after pleading guilty in 2004 to willfully signing and filing a false tax return. The 49-year-old doctor was also fined $25,000.

According to court records, the physician's accountant instructed him to deposit all payments for his medical practice into a corporate bank account so that the accountant could accurately determine the taxable income of the business. However, the doctor took some cash payments and checks from his business and deposited them into a personal credit card account and investment account. Some of the diverted funds were later used for personal purchases and were not declared as income on either the corporate tax returns or the physician's personal federal tax returns.

Better prognosis: The IRS initiative doesn't only involve auditing medical professionals. The tax agency is also joining with the American Medical Association and American Dental Association to educate doctors and other health care professionals about the perils of scams being promoted to their profession.