IR-2004-42,
WASHINGTON —
The Internal Revenue Service today issued a
consumer alert advising taxpayers to be wary of
promoters offering a tax evasion scheme that
misuses “Corporation Sole” laws. Promoters of
the scheme misrepresent state and federal laws
intended only for bona-fide churches, religious
institutions and church leaders.
"This scheme shamelessly tries to take
advantage of special tax benefits available to
legitimate religious groups and church leaders,"
said IRS Commissioner Mark W. Everson.
"Unscrupulous tax promoters always look for ways
to game the system and prey on unsuspecting
victims. Taxpayers should be on the look-out
for these and other scams."
Scheme promoters typically exploit legitimate
laws to establish sham one-person, nonprofit
religious corporations. Participants in the scam
apply for incorporation under the pretext of
being a “bishop” or “overseer” of the phony
religious organization or society. The idea
promoted is that the arrangement entitles the
individual to exemption from federal income
taxes as an organization described in Section
501(c)(3) laws.
The scheme is currently being marketed
through seminars with fees of up to $1,000 or
more per person. Would-be participants
purportedly are told that Corporation Sole laws
provide a “legal” way to escape paying federal
income taxes, child support and other personal
debts by hiding assets in a tax exempt entity.
While fraudulent Corporation Sole filings
have happened sporadically for many years, the
IRS has recently seen signs the scam could be
starting to spread with multiple cases seen
recently in states such as Utah and Washington.
The IRS is concerned about this increase and is
taking steps to pursue Corporation Sole
promoters and participants.
Used as intended, Corporation Sole statutes
enable religious leaders — typically bishops or
parsons — to be incorporated for the purpose of
insuring the continuation of ownership of
property dedicated to the benefit of a
legitimate religious organization. Generally,
creditors of a Corporation Sole may not look to
the assets of the individual holding the office
nor may the creditors of the individual look to
the assets held by the Corporation Sole.
Currently, 16 states permit Corporation Sole
incorporations. The IRS suggests that
individuals considering becoming involved in any
kind of tax avoidance arrangement obtain expert
advice from a competent tax advisor not involved
in selling the arrangement. Do not rely on legal
opinions obtained or provided by the
arrangement’s promoter. Start by asking the
following questions:
Answering “yes,” or even “maybe,” to either
of these questions should raise red flags for
taxpayers.
Additional information on Corporate Sole and
the rest of the “Dirty Dozen” tax scams and
schemes is available on IRS.gov.
Tax guidelines for churches and religious
institutions can be found in Publication 1828,
“Tax Guide for Churches and Religious
Organizations”.
Related Items:
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IR-2004-26 — IRS Updates the ‘Dirty
Dozen’ for 2004: Agency Warns of New
Scams
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Publication 1828 ( PDF
1328K) — Tax Guide for Churches and
Religious Organizations
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