My financial advisor proposed an idea to recieve income for free lance work over seas to avoid taxes. Is this legal?

Question: A neighbor is a financial advisor. He says that there is a legal way to reduce taxes on my income. I’m a freelance web designer who’s generally hired for a project or a period of time by a company that needs a new or updated website. My neighbor says he can help me set up a foreign “employee leasing” company that I’ll be employed by. When I get a project, instead of hiring me directly, the company I’m working for will hire the foreign company. I’ll be paid a salary by the foreign company, but instead of taking the salary, I’ll defer it. In the meantime, I can take loans out secured by the deferred salary or use a credit card issued by the foreign company. I won’t have to pay taxes on my income until I actually bring it onshore, and the meantime I can use the loans and credit card to pay for things in lieu of income.

This sounds too good to be true—is it?

Response: You have good instincts; it is too good to be true. If it was this easy to avoid, or at least delay, paying income taxes, I’d be billing my clients through a Cayman Islands business. The short answer is that U.S. persons are taxed by the U.S. government on their income no matter where earned. That means that even if your salary is “earned” from an offshore or foreign company, you will have to pay taxes on it. So the first implicit part of the scheme—that you can avoid or defer taxes until repatriating money to the U.S.—is wrong. As a U.S. citizen, you will be taxed by your income no matter where earned.

The second part of the scheme has to do with the notion of deferred compensation. There are legitimate ways to defer being paid compensation—and therefore being taxed on it—until the future. The 401(k) plan is perhaps the most common of these. However, there are only a very limited number of ways to do this, and being issued loans or credit cards against deferred compensation is not one of them—in that case, there is nothing “deferred” about the compensation! You’re getting the benefit of it right now. (Bear in mind that the IRS doesn’t care whether you call something “income,” a “loan,” or even “Bob”—all they care about is that functionally, it is income.)

Your neighbor’s scheme may be working for the moment for some of his dupes, victims, and criminal co-conspirators…err, I mean “clients”…but if so, that’s just because the IRS hasn’t noticed yet. Once they do, your neighbor and his clients are liable not just for the taxes they should have been paying, but also potentially for fines, penalties, and even jail time for tax evasion. Stay far, far away from anyone who claims they help you reduce or delay taxes by using offshore business or accounts—the IRS is all over those schemes and they have no basis in law.

Answered by Steven Zweig

Additional Resource: Tax evasion schemes involving offshore entities

Disclaimer: This site does not provide legal advice and users of this site should not interpret any of the information presented here as legal advice. The information provided merely conveys general information related to commonly asked legal questions. We are not a law firm and the employees responding to questions are not acting as your legal attorney. You should ultimately consult with a Lawyer for your case.