Offshore Tax Evasion

Offshore tax evasion refers to the practice of hiding assets in offshore accounts for the purposes of avoiding paying taxes on the money.  Offshore tax evasion can occur multiple ways, including putting funds into an account that the IRS cannot find, or setting up “shell” corporations that are created for the sole purpose of shielding the business from tax liability.  The main challenge for the IRS in offshore tax evasion schemes is that it is very difficult to detect and prosecute offshore structures when the IRS has no jurisdiction to require the foreign countries to turn over account information.  As such, offshore tax evasion remains prevalent in the US.

Reporting Income Overseas

The most common offshore tax evasion situations occur in cases where a foreign account has been set up for an individual to “hide” money in, or when a business sets up shell corporations in offshore locations to avoid taxation.  Often times, offshore tax evasion structures are highly complex and difficult to get good information on. Even when business do make limited reporting on offshore assets; it is virtually impossible to tell if that reporting is accurate.  Corporations often create an entity in the Cayman Islands to avoid taxation; however, it should be noted that not all Cayman of offshore structures are tax evasion per se.  It is important to look at all of the facts and circumstances before making a determination of whether tax evasion is occurring when you are conducting Offshore Tax Planning.

What is Considered Offshore Tax Evasion?

The IRS has been unable to create a hard and fast definition for offshore tax evasion; however, when taken together, the facts and circumstances surrounding and individual situation can make a strong case one way or another.  For tax purposes, ‘evasion’ is defined as the intent to establish a “web” of offshore entities that are used to hide the true owners of specific assets and to conduct fictitious transactions to create false losses and tax deductions.

‘Evasion’ does not occur every time business is done outside of the US; rather, evasion occurs when individuals or businesses engage in offshore transactions for the explicit purpose of evading taxes.  For taxpayers who own ‘legitimate’ offshore accounts (i.e. inheritance from a foreign relative; prior offshore work engagement), evasion is not an issue.  As a general rule, if the tax structure of account is set up for the sole purpose of gaining a tax benefit, the structure may be considered evasion and may make the holder or owner of the account liable to the IRS for serious penalties and fines.

Getting Legal Help

To avoid issues related to offshore tax evasion, individuals and businesses should seek the advice of a tax attorney specializing in offshore tax vehicles and accounts.  A qualified attorney will be able to provide guidance on the acceptable reasons to have an offshore account or structure, and well as protect individuals from getting into a precarious situation with the IRS.  Similarly, if you have been charged with offshore tax evasion by the IRS, you are well advised to contact an attorney immediately to discuss your options.

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