Having a bank account, trust, safety deposit box, or other method of owning assets outside of the United States is not illegal. Failing to disclose these assets is! At US Tax Relief we have experience working with high net worth individuals, business owners, and corporations who take advantage of these tax deferral opportunities.
What is an Offshore Tax Shelter?
If you and your money live in the U.S., your financial assets are subject to American tax laws imposed by the Sixteenth Amendment. To avoid paying this tax liability, taxpayers move their money into offshore tax shelters.
Essentially, offshore tax shelters create legal loopholes to defer taxation on investments. Specific investment strategies are used to minimize or evade tax liabilities by putting off payments. Instead of paying income tax on investment contributions for a given year that dollars are earned, they are included in taxable income for the year in which they’re withdrawn—usually many years later. Many taxpayers fall into a lower bracket after retirement, enabling them to lower their current tax liability and pay a lower rate at the time they begin using the money.
White hat tax shelters such as 401(k)s and IRAs are frequently used to taxpayers’ advantage, and with good reason. However, going offshore and repatriating your money is considered black hat in the eyes of the IRS.
Offshore Tax Havens Explained
Although offshore tax shelters may be used by taxpayers of every stripe, offshore tax havens seem accessible to only large companies and wealthy individuals. Shrouded in mystery and financial secrecy, leaked documents such as the Panama Papers and the Paradise Papers shed light on how these schemes work.
An offshore tax haven is simply a place—be it a country, state, or territory—with relaxed tax laws (usually either no income tax at all, or tax at much reduced rates). Multinational companies establish subsidiaries in offshore tax havens to avoid paying the 35% corporate tax in the U.S.
Tax havens also provide banking services to individuals who want to hold their assets offshore in order to avoid taxes. In addition to easily accessible bank accounts and trusts, it’s also very easy for foreigners to establish offshore corporations. Say, for example, a wealthy individual has a large piece of property in the U.S. but does not want to pay property tax, they can create a “shell company” in an offshore tax haven under a different name and transfer ownership to that property.
Here are examples of several vehicles used to conceal assets and income which should be subjected to U.S. tax.
Types of Offshore Tax Avoidance
There are many different devices taxpayers utilize to conceal transfers of money or property to foreign entities for offshore tax evasion, including:
- Foreign trusts
- Foreign corporations
- Foreign (offshore) partnerships, LLCs and LLPs
- International Business Companies (IBCs)
- Offshore private annuities
- Private banking (U.S. and offshore)
- Personal investment companies
- Captive insurance companies
- Offshore bank accounts and credit cards
- Related-party loans
Once money or property titles are moved offshore, the taxpayer can manage it with ease using fund transfers. Although this is technically legal, it is incredibly frowned upon by the IRS.
There are many popular places successful businesses and wealthy individuals choose for offshore tax evasion.
- In addition to being a tropical paradise, Bermuda and the Cayman Islands both offer full protection for corporate profits.
- Switzerland allows wealthy individuals to shield both their income from taxes and their identity from prying eyes.
- The British Virgin Islands are considered an offshore tax haven because they have no sales, corporate, capital gains, inheritance or estate tax.
- Luxembourg is a lesser known offshore tax haven, and is the chosen location that Apple, Inc. uses to direct its revenue stream from iTunes sales in exchange for tax breaks.
Many countries, including the U.S., are beginning to crack down on offshore tax avoidance, so havens that offer anonymity are usually the preferred choice.
Measures to Stop Offshore Tax Avoidance
In order to prevent offshore tax evasion and deferral, Congress has enacted several specific provisions in the IRS code. Despite these changing regulations, many U.S. corporations manage to avoid paying billions of dollars in federal income tax. In recent years Congress has introduced several measures to limit or close these loopholes.
Although banking offshore is legal, hiding it is not. Concealing wealth from the government is considered tax evasion and doing so could put you in very hot water with the IRS. The best thing to do is to avoid this gray area altogether and steer clear of controversial offshore tax avoidance; if you’re looking to lower your tax liability, stick to sanctioned tax shelters instead.
US Tax Relief can help you find tax breaks you might not have been aware of, thereby lowering your bill and getting the most money out of your income tax return. We also offer professional tax advice for those who’d like more information on offshore tax evasion and the consequences it poses. Contact us today to see how our services can help.