A Colorado man pleaded guilty yesterday to conspiring to defraud the United States and tax evasion related to his promotion and use of an illegal tax shelter. He also pleaded guilty to wire fraud related to his operation of a fraudulent investment scheme.
The following is according to court documents and other statements made in court: from 2018 through 2023, Timothy McPhee, of Estes Park, promoted a fraudulent tax shelter to taxpayers across the country. The tax shelter was made up of a private family foundation and three trusts called a business trust, family trust, and charitable trust. McPhee taught clients who purchased the tax shelter how to use the trusts and foundation to evade paying federal income taxes on nearly all their income.
Among other directions, McPhee instructed clients to assign nearly all their business income to the trusts and to all false tax returns that made it seem as if that income belonged to the trusts, not the client. He also told clients to spend the money in the trust bank accounts on their own personal expenses and to fraudulently claim those expenses as deductions on the trust tax returns. As a result, clients who used the tax shelter paid taxes on only about 2% of their income. But because the clients funded the trusts, controlled the money in the trusts, and benefitted from the trust funds, the income funneled to the trusts was taxable to the clients themselves. In pleading guilty, McPhee acknowledged that he gave directions to clients that he knew directly contradicted IRS guidance and that he deliberately ignored warnings from accountants and attorneys that the tax shelter was fraudulent and illegal.
In total, use of the tax shelter caused a loss to the United States of about $45 million in unpaid federal income taxes.
McPhee also personally used the tax shelter to conceal from the IRS more than $5 million in income earned from 2016 through 2021. In so doing, McPhee did not pay approximately $1.8 million in federal income taxes he owed those years.
From January 2023 through May 2024, McPhee also operated and promoted a fraudulent investment scheme called the “ROI Cash Flow Fund.” McPhee promoted the ROI Cash Flow Fund as an opportunity for investors to earn a 3% monthly payout on a principal investment. He falsely told investors that the ROI Cash Flow Fund would generate monthly returns by sending the investors’ funds to a third-party borrower who would engage in foreign exchange currency trading. In total, based on McPhee’s false representations, investors sent more than $8 million to bank accounts he controlled.
In reality, however, McPhee did not send the investors’ funds to a borrower as promised. Instead, he used investor funds to make monthly 3% payouts to investors. He also spent investor funds on his own personal expenses and investments, including by sending more than $2 million in investor funds to a bank account he held in the name of one of his trusts.
McPhee is scheduled to be sentenced on Oct. 23. He faces a maximum penalty of five years in prison for conspiring to defraud the United States, a maximum penalty of five years in prison for tax evasion, and a maximum penalty of 20 years in prison for wire fraud. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.
Acting Deputy Assistant Attorney General Karen E. Kelly of the Justice Department’s Tax Division made the announcement.
The FBI and IRS Criminal Investigation are investigating the case.
Trial Attorneys Lauren K. Pope and Amanda R. Scott of the Tax Division are prosecuting the case.