Every year seems to bring with it new tax scams and new challenges in educating our clients on how to tell the difference between a “fake” and a legitimate tax strategy. When your clients are the ones bringing a supposed tax savings opportunity to the table, you need to be prepared to explain why it is raising red flags for you. This investment in taxpayer education can also help increase your clients’ sense of your expertise and trust in the tried-and-true tax strategies you are recommending.
Recently, we shared a blog covering the basics for evaluating the legitimacy of a tax strategy. Today, we’ll dive deeper by looking at a recent tax scheme known as the “sovereign tribal tax credit.” Walking through the telltale signs of fraud in this scenario will equip you to better spot new scams that are actually too good to be true.
First, what are sovereign tribal tax credits? Promoters pitched it like this: due to their sovereign status, Native American tribes receive billions of dollars in tax credits from the federal government. This is, in fact, true, which is the first way scammers throw taxpayers off the scent. The spin is a claim that tribes are willing to sell these credits to investors at a discounted price of 50 to 60 cents per dollar. The sellers get the cash, and the buyers can use the tax credit to lower their overall tax liability, presumably making this an appealing offer to wealthier individuals who are likely to have a high tax bill.
The promoters claimed to have formed a partnership with a Native American tribal organization to create tax credits and fund local businesses and infrastructure projects. In short, these tax credits were being advertised as a way to save money while supporting economic development in Native American communities.
The Problem
One way that scammers hid the falsity of their claims was by making this deal sound similar to legitimate tax credits. The clean energy tax credits offered through the Inflation Reduction Act worked like this—businesses that were eligible for the tax benefit but needed cash more could sell their credits to businesses looking to lower their tax bill. However, this setup is unique to the Inflation Reduction Act. After the sovereign tribal tax credit scam surfaced, the U.S. Treasury clarified that no federal tax credits are allowed to be sold in this way.
Secondly, when tax credits like these are statutorily granted the permission to sell, this typically means they are selling an ownership interest in an asset, such as solar panels. The same should be true for the tribal credits. But what is the asset in question when it comes to the tax credits allotted to Native American tribes? The tax credits are connected to tribal lands. The problem is that people who are not part of the native tribe cannot own that land. So if it’s impossible for the buyer to take over that asset, how would they actually qualify for the tax credits?
Lastly, business news outlet Bloomberg conducted an investigative report that revealed just how problematic the sovereign tribal tax credits truly were. Journalists looked into the claims of the White River Energy Corporation, which claimed to be managing $64 billion in sovereign tribal tax credits. Bloomberg contrasted this with the $8 billion in tribal assets managed by the U.S. Department of Interior. How is it possible that the U.S. government only manages $8 billion on behalf of tribes and tribal members and yet this private company has access to eight times that amount? The conclusion was clear: the entire scheme simply did not make sense.
The Red Flags
The red flags in this case were plentiful and hardly limited to those mentioned above. Other telltale signs of a scam included:
• Unverifiable credits
• Fabricated tribal involvement
• Misrepresentation of legal opinions
• Aggressive marketing tactics
First was the plain fact that no government entity could verify that these tax credits (as promoted by the scammers) actually existed. The federal government must necessarily be involved in creating new federal tax credits, so any promotional materials that talk about other entities creating a tax credit should automatically raise a red flag. Similarly, the tribes mentioned in these promotional materials denied any involvement with these promoters. Tribes that were named, such as the Cherokee Nation, even sent them cease-and-desist letters.
Next, the promoters intentionally misrepresented legal opinions. Many ads claimed that well-known law firms had validated the legitimacy of this tax strategy. Soon after the Bloomberg report, many of these firms issued statements denying they had done any such thing. This is a common tactic by scammers: relying on the complexity of the tax code to confuse taxpayers who may naturally look to see if an “expert” has reviewed these claims since they do not have the background to investigate the law themselves.
What would a legitimate legal opinion look like? An expert needs to meet court standards. They need to have the appropriate degrees, certifications, professional background, and tenure in their field. Additionally, the legal expert would ideally specialize in the topic they are giving this opinion on. A reliable attorney should be considered an expert by others and use trustworthy source documents, like Treasury regulations and relevant court cases, to back up their opinion.
Finally, the use of aggressive marketing tactics can point to a scam. By creating a sense of urgency, promoters can push unwitting taxpayers to make a quick decision without thoroughly investigating their claims. While it is true that legitimate tax strategies could involve a limited number of credits that are available for a limited amount of time, thoughtful research is needed to demonstrate that the credits are worth pursuing, so avoid the temptation to rush this process.
The Takeaways
By learning from the many red flags in the sovereign tribal tax credit scheme, you will be better prepared to ask the right questions the next time an unfamiliar tax strategy comes your way. In addition to looking for the red flags named above, keep these tips in the back of your mind:
Don’t rely on name recognition alone. As seen in this case, scammers may use recognizable brands and organizations in their promotional materials to create an air of authenticity. The Bloomberg report revealed that none of the authorities referenced in the tribal tax case—from the law firms to the Native tribes to the U.S. government itself—had actually approved this tax strategy. Do your own investigation before trusting appearances.
Pay attention to who is selling the offer. Promoters often suspiciously omit their own names from these deals. They hide behind agents and avoid signing off on any official tax documents. In the case of the White River Energy Corporation, the CEO even refused to issue a statement, claiming that the company needed to protect their “confidential trade secrets for competitive purposes.” Remember, lack of transparency is a major red flag.
Finally, determine if you can answer the question “why does this tax credit exist?” When it came to the tribal tax scheme, none of the promoters would explain how exactly these credits help develop the nations. Were they raising cash to open a casino or another business to stimulate the local economy? Were they raising funds to build a business development center on the reservation to invest directly in community members? The promotional materials were intentionally vague, banking on taxpayers’ lack of understanding of how tax credits work.
The savvy tax planner is prepared to protect their clients—and their business—from scammers promoting tax strategies that cannot be substantiated. To stay on top of the latest tax schemes and learn how to properly educate your clients, reach out to us to become a Certified Tax Planner.
