Disguised Ownership

With over several thousand pages, the United States tax code is anything but simple.  But the basic concept is simple: all taxpayers must report their income and pay the appropriate taxes.  Which leaves another obvious observation: taxpayers have no duty to report or pay taxes on income that they did not receive.  This concept is so basic and obvious that every taxpayer knows it even if they’ve never been asked to articulate it into words.

So for someone who wants to minimize their tax bill, there’s always one obvious route: minimize income.  But if done legally, this scheme is self-defeating since it will leave the individual with less money in addition to a lower tax bill.  So in order to gain the benefits of being taxed based on a lower income rate while also maintaining access to their income, some taxpayers will attempt to put income in assets in the names of another, typically a family member or a close friend that can be trusted to continue to provide the benefits of the income to the taxpayer.

If done to evade taxes and conceal income, the IRS will prosecute these actions as tax evasion.  Individuals who own no bank accounts or credit cards in their own name but still direct financial transactions through family members are likely to be viewed as tax evaders by the IRS.  While there’s nothing illegal about giving gifts or allocating income to family members, when this is done nominally while the taxpayer retains the real control over the assets, the IRS is likely to view this unfavorably.  Using credit cards and bank accounts held in others’ names to purchase necessary goods and services is viewed as a sign that the individual attempted to conceal income and assets to evade income taxes.

This is not to say that the tax code is hostile to those who make altruistic allocations of income/assets to family members.  Many individuals have disclaimed inheritance bequests in favor of family members in order to avoid unwanted taxes.  There is nothing illegal in this, even though the individual is doing this for the purpose of avoiding income, gift and estate taxes.  But when income or an asset is given to another while the grantor retains the full use and benefit of it, the IRS may view this as tax evasion and prosecute the individual.

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