The IRS is not only concerned with abusive tax avoidance and tax fraud schemes that are prevalent within the country but also those that occur offshore. It appears there is an increasing number of offshore tax avoidance schemes that are being perpetrated with the intention of avoiding taxation on income that should be taxed by the United States government. As a result, the IRS has teamed up with “external stakeholders” to widen the net cast to catch both those who benefit from the schemes as well as those who initiate the scheme in the first place. The IRS has created an “abusive scheme toolkit” to help bring together different parties in the search, identification and eventual prosecution of those who attempt to escape lawful taxation.
Tax havens and the role they play in offshore tax schemes
According to the IRS there is an estimated $5 trillion worth of assets from across the globe being held in offshore “tax havens”. Of that number, it is believed a large share is being transferred from the United States and may represent a loss in US revenue of 70 billion dollars- per year. Tax havens are found in many foreign countries which offer financial secrecy laws and impose little if any taxation on income that is sourced beyond their jurisdiction. This type of environment is extremely favorable for individuals or companies whose goals involve avoiding tax on US earned income. The IRS recognizes at least 40 foreign locations which market themselves as tax havens in the hopes of drawing those who wish to move their money offshore. Most of these are emerging nations however the largest concentration of assets are generally found in established tax havens that have for many years provided protection for those evading taxation on American soil.
Identify legal transactions
While there is a great focus on foreign transactions as they relate to tax evasion, there are legitimate and legal reasons why a person or company may be doing business offshore. The IRS is not interested in halting all foreign transactions, just those designed to cover or hide income that is subject to taxation stateside. The following are examples of legitimate business transactions.
- Establishing a foreign corporation- This is often required to legally conduct business in a foreign country.
- Foreign partnerships- The establishment of a foreign partnership is often the only way for parties from more than one country to combine financial resources as well as knowledge.
- Foreign trusts- Like other trusts, a foreign trust allows a manager to control assets that may not otherwise be managed properly by the beneficiaries.
Despite the fact that the above mentioned scenarios can be legitimate, they are also known to be used in offshore tax avoidance schemes, therefore remain under the watchful eye of the IRS and stakeholders.
How to avoid offshore tax avoidance schemes
The IRS has published literature which outlines many of the issues resulting from offshore tax avoidance schemes. This information points out what the IRS considers legal activity as well as situations that alert the IRS to possible fraudulent activity. It is illegal to move money from the United States to offshore locations for the sole purpose of evading taxes. Any person or entity that considers this move should be aware that the IRS is continually expanding their reach as well as actively educating other parties in how to spot tax evasion.