Senate Examines Internet Tax Frauds

The Senate wants to make it clear: If you think setting up your own church will keep you from paying taxes, you had better pray you don't get audited.

The Senate Finance Committee held a hearing today highlighting what it claims is a growing tax evasion problem in the United States: people using or being lured by Internet-based sites offering them apparent tax breaks — including bogus church charters — that turn out to be nothing but scams.

"The number of participants in these tax scams is growing like a weed," committee Chairman Charles Grassley, R-Iowa, said this morning. "The Internet gives these tax con artists the unprecedented ability to reach out to millions of households cheaply and easily."

Aaron Bazar of North Potomac, Md., said he lost $8,000 becoming involved in what turned out to be an illegal pyramid scheme. Bazar said he first got involved in the project after responding to an unsolicited e-mail.

"If somebody wants to steal from people, the Internet is the place to do it," Bazar told the committee.

Impure Trusts

Grassley added that at the forefront of his concerns are what he says are "old-style scams — such as pure trusts, constitutional trusts … even setting up your own church — that are being put into new bottles and sold."

According to the committee's research, the most common tax-avoidance scams involve setting up "pure trusts" as a means of illegally claiming exemption from tax obligations. But there's a basic problem that scam sites neglect to mention: Citizens are still responsible for taxes on the income they funnel into such trusts.

Still, "pure trust" sites flourish, and often present pages detailing historical claims for their arguments. At times the Web sites try to lure customers by claiming that the very rich are beyond the long arm of the Internal Revenue Service — and that anyone can enjoy tax-free citizenship as a result.

One Web page purporting to explain the history of the "pure trust" system claims it was developed by "ultra-rich banking families such as Rockefeller, Kuhn-Loeb, Morgan, etc.," making it "almost impossible for government to deny you the same protection today."

Others present constitutional arguments for "pure trusts," conveniently ignoring the numerous mentions of taxation in the Constitution, including the very first sentence of Section 8: "The Congress shall have Power To lay and collect Taxes."

Church Charters and Fake Countries

Some sites also offer ministerial credentials as well as, in some cases, church charters, which some people believe allow them to establish themselves as a tax-exempt church. In many cases, the person's home is listed as the "church," with family members described as the "congregation."

But as with trusts, individuals are still responsible for their incomes. Transferring money earned from a job to a separate organization does not mean that income taxes do not apply to the earnings. Moreover, the burden of proof, held up in numerous court cases, is on those setting up churches to prove that they have done so for religious reasons.

And some people looking for tax breaks on the Internet have plowed their money into still more dubious plans. In some cases, schemers have concocted fictitious countries and tried to lure investments from unsuspecting dupes — some of whom are looking for a place to park money they believe will be beyond the reach of the IRS.

The best-known of these fake countries is the "Dominion of Melchizedek," a concept begun about a decade ago. The fictitious country has a detailed Web site with pictures purporting to show an island nation. The site even purports to document Melchizedek's supposed government, university and other institutions.

And although it has been listed in the book Tax Havens of the World, fraud investigators say the alleged nation is just the work of California-based schemers illegally claiming an uninhabited Marshall Islands atoll as their own. Which shows that on the Web, churches and islands are not always the havens they appear to be.