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“Corporation Sole” Tax Scams

On March 29th 2004, the IRS posted a fraud alert warning consumers and taxpayers of the misuses of “Corporation Sole” laws.  Often the promoters of the scheme misrepresent the state and federal laws that are intended for bona fide religious organizations

Would-be participants in the scam are told that a religious organization can take advantage of Corporation Sole laws to provide a legal way to escape taxes.  They are told that everything form taxes on property, child support and personal purchases are tax exempt under these scams.

Many times promoters are paid by the taxpayer to set up one time sole proprietor corporations for a fee and they often sell information and run seminars for a fee. 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.

When Corporation Sole laws are used as intended statutes enable religious persons and leaders to be incorporated for the purpose of insuring the continuation of ownership of the property dedicated to legitimate business under the religious organization.  Generally, when a creditor looks at the assets of a Corporation Sole they must look beyond the individual and look at the assets of the corporation.  Currently, sixteen states allow Corporation Sole entities.

If the Corporation Sole is created to avoid taxes, it is probably illegal.  Corporation Sole laws exist to allow the religion to prosper and are based in the fact that there actually is a religion to promote.  The IRS has vowed to continue to pursue Corporation Sole cases that abuse taxation. Tax guidelines for churches and religious institutions can be found in Publication 1828, “Tax Guide for Churches and Religious Organizations”.