YEAR END TAX SCAMS GETTING A BIG PUSH – AND PUSH BACK – FROM UNCLE SAM

At the end of every year clients of all types (especially MD’s) and advisors rush to find last minute ways to minimize the tax liability for the year. We see many plans of questionable value and legality pushed through in the last couple of weeks when due diligence is slowed by Holiday schedules and your trusted advisors’ massive workloads. Here are some potential landmines to look out for. If you are being pressured into funding a plan over the holidays, make sure you know exactly what you are stepping into and have experienced counsel.

Where did this list come from? THE I.R.S.

In contrast to their many legitimate roles, foreign entities are increasingly being promoted as a means to divert income and conceal assets for taxpayers who have no real operations in a foreign country.

In addition to preferential tax regimes and protection against creditors (which is how and why I use them to protecet people every day – with full tax reporting), most tax havens also offer strict laws against disclosure of banking and business records. Generally, these nations do not have income tax treaties with the United States, and tax evasion is not considered a criminal act subject to Mutual Legal Assistance Treaties. Promoters of many abusive offshore schemes rely on the difficulty of access to records of tax haven banks, attorneys, and trustees. Furthermore, in the absence of government scrutiny, some offshore banks, attorneys, trustees, and other service providers have been known to falsify or fabricate records.

Despite being hidden or disguised, the income and assets of U.S. persons are still subject to U.S. tax. Taxpayers should be aware that abusive offshore arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of arrangements. Furthermore, taxpayers and/or the promoters of these offshore arrangements may be subject to civil and/or criminal penalties.

Following are summaries of some identified schemes that make the IRS mad:

(Offshore) Limited Liability Companies (LLCs) – In response to efforts by the Organization for Economic Cooperation and Development (OECD) to eliminate harmful tax competition, some nations labeled as tax havens have accused OECD members of carrying on the very practices the members seek to stop. One example put forth is the ease with which nonresident aliens may do business through limited liability companies (LLCs) domiciled in the United States, in comparative anonymity. An October 2000 report by the General Accounting Office gives insight into the use of corporations as conduits for illicit funds. Abuse of anonymous corporations in the U.S. by foreigners mirrors the abuse of tax haven entities by U.S. persons.

Offshore Deferred Compensation Arrangements – Many highly compensated professional persons and business owners in the U.S. have been solicited to participate in “offshore deferred compensation plans”. The U.S. taxpayer is encouraged to sever an existing employment relationship and substitute an arrangement in which the nominal employer is a foreign “employee leasing” company. The supposed result of this abusive arrangement is that the taxation of a large portion of the professional’s or business owner’s salary is deferred while he/she gains immediate access to the funds through loans or offshore-based credit cards. An improper deduction for employee leasing expenses is also created on the corporate tax return.

Fictitious or Overstated Invoicing – Some U.S. taxpayers have entered into schemes in which the taxpayer’s U.S. business is billed by a purportedly unrelated offshore entity for goods or services (e.g., “consulting services”) that are either nonexistent or overvalued.

Factoring of Accounts Receivable – A U.S. taxpayer’s business may discount or “factor” its receivables to a purportedly unrelated foreign business entity. The discount or factoring fee significantly reduces U.S. tax liability, and is moved to an offshore entity where it can either be invested free of U.S. tax or repatriated for the taxpayer’s use and enjoyment.

Abusive Insurance Arrangements Some promoters have devised arrangements that are characterized as insurance arrangements, giving rise to a deduction for the U.S. taxpayer for “premiums” paid to a purportedly unrelated offshore insurance company. Often these arrangements are merely self-insurance, lacking in real transfer of risk.

Shifting of Income Using Offshore Private Annuities – Some promoters suggest that U.S. taxpayers may avoid or substantially defer tax on income streams or capital gains by exchanging property for an unsecured private annuity. In another abusive scheme an offshore private annuity is used in conjunction with an offshore variable life insurance policy as a devise to “decontrol” a foreign corporation or other entity used in an abusive sequence of transactions. As a result the promoter claims that the foreign corporation or entity is owned by the insurance policy and is not a, controlled foreign corporation, passive foreign investment company, or any entity controlled by a U.S. person whose income could be taxed in the United States to its owner.

Offshore Internet Business – For businesses conducted primarily through the internet, promoters offer “kits” which give the appearance that the business is foreign owned and operated. Transactions may be routed through offshore servers, and business receipts may be collected through offshore bank accounts or credit card merchant accounts. These schemes particularly target businesses that offer delivery of computer software and other digital products such as music, pictures, or video. They may also provide a means of operating offshore gaming activities.

Offshore Wagering – Over the last few years, gambling websites have proliferated on the Internet. Many of these virtual casinos are organized and operated from offshore locations, where the operators feel free from State and Federal interference. The operators of these activities may suggest that players in the U.S. are not subject to tax on their winnings, and may handle collections and disbursements in ways designed to facilitate avoidance of U.S. taxes.

Repatriation of Offshore Funds Using Credit Cards (such as MasterCard and VISA) issued by tax haven domiciled banks are a preferred method used by U.S. taxpayers to anonymously and covertly repatriate offshore funds that may or may not have been previously taxed. American Express cards are used in the same way but differ in that these cards are issued directly by American Express rather
than by member banks.

Original link to I.R.S. – http://www.irs.gov/businesses/small/article/0,,id=106559,00.html

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