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Tax Fraud - Offshore Tax Shelters
Does hiding your income in offshore bank accounts sound like a great way to avoid paying taxes? If you said yes you may want to find out more before you try it yourself.
It is illegal to hide taxable income in offshore banking accounts and the IRS says that's exactly
what a growing number of people are doing when they open accounts in tax-haven countries. This
scam was is pretty much the number one scam that the IRS is faced with. The IRS is concentrating
its efforts in this area and have done quite well in recovering a large amount in taxes, interest
and penalties associated with illegal offshore accounts. The IRS says its agents and state law
officers will continue to aggressively pursue taxpayers and promoters in this area.
In other words, if you think you can easily move your money to a little island in the Caribbean
to avoid paying taxes think again. You won't be able to "fly under the radar" and get away with
it because the IRS is too busy and has too few resources to track you. The IRS is on the lookout
for this kind of activity and they know just what to look for. Anybody telling you different is
either full of it and just trying to sell you a book or too stupid to take seriously in the first
place. I don't know which is worse. If you fall for it either way you could be the one going to
jail and then who's the stupid one?
Some of the Top Offshore Tax Schemes
Offshore tax evasion or taking your money to another country to avoid paying taxes can take many forms. Some offshore schemes can be as simple as taking unreported cash receipts and flying to a tax country that acts as a tax haven and depositing the cash into a bank account. Others are more elaborate involving numerous domestic and foreign trusts, partnerships, nominees, etc. The following schemes are not all-inclusive, but just a sample of abusive tax schemes.
Abusive Foreign Trust Schemes: The foreign trust schemes usually start off as a series of domestic trusts layered upon one another. This set up is used to give the appearance that the taxpayer has turned his/her business and assets over to a trust and is no longer in control of the business or its assets. Once transferred to the domestic trust, the income and expenses are passed to one or more foreign trusts, typically in tax haven countries.
As an example, a taxpayer's business is split into two trusts. One trust would be the business trust that is in charge of the daily operations. The other trust is an equipment trust formed to hold the business's equipment that is leased back to the business trust at inflated rates to nullify any income reported on the business trust tax return (Form 1041). Next the income from the equipment trust is distributed to foreign trust-one, again, which nullifies any tax due on the equipment trust tax return. Foreign trust-one then distributes all or most of its income to foreign trust-two. Since all of foreign trust-two's income is foreign based there is no filing requirement.
Once the assets are in foreign trust-two, a bank account is opened either under the trust name or an International Business Corporation (IBC). The trust documentation and business records of this scheme all make it appear that the taxpayer is no longer in control of his/her business or its assets. The reality is that nothing ever changed. The taxpayer still exercises full control over his/her business and assets. There can be many different variations to the scheme.
International Business Corporations (IBC): The taxpayer establishes an IBC with the exact name as that of his/her business. The IBC also has a bank account in the foreign country. As the taxpayer receives checks from customers, he sends them to the bank in the foreign country. The foreign bank then uses its correspondent account in the to process the checks so that it never would appear to the customer, upon reviewing the canceled check that the payment was sent offshore. Once the checks clear, the taxpayer's IBC account is credited for the check payments. Here the taxpayer has, again, transferred the unreported income offshore to a tax haven jurisdiction.
False Billing Schemes: A taxpayer sets up an International Business Corporation (IBC) in a tax haven country with a nominee as the owner (usually the promoter). A bank account is then opened under the IBC. On the bank's records the taxpayer would be listed as a signatory on the account. The promoter then issues invoices to the taxpayer's business for goods allegedly purchased by the taxpayer. The taxpayer then sends payment to the IBC that gets deposited into the joint account held by the IBC and taxpayer. The taxpayer takes a business deduction for the payment to the IBC thereby reducing his/her taxable income and has safely placed the unreported income into the foreign bank account.
How do Tax Evaders Access their Funds from Offshore Accounts?
Although the unreported funds sitting in the offshore bank account are earning interest or being used for investment purposes, most of the time the taxpayer wants to have access to the money. There are several methods used to get the funds back to the taxpayer, but the following are the most common.
Fraudulent Loans: The taxpayer's International Business Corporation (IBC) will make a loan to the taxpayer. The funds are wire transferred back to the taxpayer's U.S. bank account. Since these wired funds are allegedly loans they are not taxable. Many times ownership of the IBC is through bearer shares so it is very difficult to prove that the loan is a complete sham. Further adding to the difficulty is the fact that the promoters provide their clients with loan documents to make the transaction appear legitimate.
Credit/Debit Card: One of the most popular methods in recent years has been use of the bankcard to access offshore funds. Once the foreign bank account is established, the taxpayer is issued a bank card. The taxpayer can use the bankcard in the to withdraw cash and to pay for everyday expenses.
Offshore Tax Evasion Penalties
Investors of abusive tax schemes that improperly evade tax are still liable for taxes,
interest, and civil penalties. Violations of the Internal Revenue Code with the intent to
evade income taxes may result in a civil fraud penalty or criminal prosecution. Civil
fraud can include a penalty of up to 75% of the underpayment of tax attributable to fraud,
in addition to the taxes owed. Criminal convictions of promoters and investors may result
in fines up to $250,000 and up to five years in prison.
Related Tax Fraud Links:
IRS Free Online Filing
The "Dirty Dozen" Tax Scams
Tax Scams - How to Recognize and Avoid Them
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