How Tax Cheats Are Using Your Money to Fund Republicans

Every year, just before Tax Day, the Internal Revenue Service conducts a dog and pony show to demonstrate how it is cracking down on tax cheats.

Routinely, the IRS focuses on stories that involve crooked tax preparers and small-time taxpayers who try to erase a few hundred and occasionally even a few thousand dollars from their bills.

This year was no exception. At a press conference on April 3, IRS Commissioner Mark Everson announced civil injunction suits against five corporations in Atlanta, Detroit, Chicago and Raleigh that are franchises of Jackson-Hewitt, the nation's second-largest tax preparation firm, which the IRS accused of routinely faking returns for some of its 100,000 clients.

Jackson-Hewitt is a quickie, low-fee operation. The IRS says stores accepted false W-2s and faked data to get clients the earned-income credit for the poor. The amount underpaid through returns prepared by 125 stores was estimated at $70 million.

While the story made national headlines, the government targeted an operation that catered to little guys, the poor and lower middle class. However, they failed to focus on some big-time tax cheats whose fraud was much greater, but who happen to be top-tier Republican contributors. What the press conference should have announced was: "Swift Boat" financier Sam Wyly cheated the U.S. of at least $300 million in taxes." And, "The money that paid for the "Swift Boat" campaign was your money!"

How does someone cheat the government out of that much money and -- until now -- get away with it?

Megabucks Sam didn't pull into a mall with a Jackson-Hewitt franchise store. He had expensive help from his bankers and accountants. The scam is detailed in a report issued Aug. 1 by the Senate Subcommittee on Investigations, the result of a lengthy probe by the staff of Sen. Carl Levin, D-Mich.

Everson knows about it because he testified at the hearing that presented the report.

Wyly did his cheating through an offshore scheme that hid $1 billion in profits via Isle of Man "shell companies" that existed only on paper, were registered under front men to hide the Wylys' names, and were used to carry out transactions and launder money. And that's only the hidden income that was found. The Dallas mogul, with a $1 billion admitted net worth, may be guilty of the biggest personal tax fraud in U.S. history.

Wyly used a system popular with megarich corporate executives. In 2000, Bank of America, the country's second-largest commercial bank, began offering a tax shelter called STARS, which the IRS has ruled illegal. Among the happy clients were Wyly and his brother Charles, who controlled the $5 billion Michaels Stores, the arts-and-crafts retailer with 900 shops.

The idea was to evade taxes by giving themselves stock options and transferring them to offshore corporations controlled by secret trusts in the Isle of Man, that famous British tax haven in the Irish Sea. "Manx" companies are routinely fakes; one of the front men on the boards of all the Wyly entities is a sheepherder, who picks up cash for use of his name.

U.S. law requires major stockholders to report their holdings to the Securities and Exchange Commission. Company officials from Michaels Stores admitted that the Wylys had transferred company securities to offshore trusts and subsidiaries, and that the company and the Wylys had not reported it.

If you want to know how they did it, read the following paragraph. If your eyes glaze over, skip to the next.

How the scam works: A public company grants stock options to a top executive. The executive transfers the options to a trust or partnership controlled by his or her family. The transfer is called a "sale" and the trust "pays" for the options with a note due in 20 or 30 years. After the options are transferred, the trust exercises the option to buy stocks which it sells on the market. The executive plays out the fiction that tax is not owed until the deferred payment date, although in fact he controls the profit stashed offshore in a secret account where the IRS can't find it.