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| Don’t Be Tempted by Offshore Tax Shelters |
11-17-2006 |
When it comes to financial planning, the Internet has done wonders to level
the playing field between wealthy corporate fat cats and the rest of us. With
the click of a mouse, we can now plot our own financial course using the same
instruments that were only available to a wealthy few a generation ago.
But sailing with the big boys also can run your financial ship aground if you
succumb to the siren song of offshore tax shelters. The image of Daddy Warbucks
tucking millions away into an offshore account to avoid taxes is an enduring one
in American society.
Our better selves may realize that tax dodgers only place a burden on the
rest of us to carry a greater share of the financial burden of society, but who
doesn’t long to keep a little more of their earnings after the taxman cometh?
Today, thanks to the Internet, offshore tax shelters are just a mouse-click
away. For fees of $2,500-$3,000, hundreds of virtual brokers, accountants,
attorneys and other middle men will gladly help you set up offshore trusts and
accounts in such tax-free sovereign nations as the Bahamas and Belize, just like
the big boys. Transferring your assets offshore is not illegal - but doing so
for the purpose of avoiding taxes is. And with the Internal Revenue Service
rededicating itself to enforcement these days, it’s a particularly risky move
now.
Don’t Look There, Look Here No one knows precisely how many U.S. dollars have
been transferred into offshore tax shelters, or what they’ve cost American
taxpayers in lost revenue. Tax Justice Network, a group opposed to the practice,
estimates that $1.6 trillion in North American wealth alone may be held in
offshore accounts today. One expert estimates the cost to taxpayers from U.S.-held
offshore accounts could run as high as $50 billion annually. Given that the IRS
recently outsourced debt collection to recover a measly $1.4 billion over the
next decade, it’s a good bet they’re fixing to ramp up considerably their
pursuit of the $50 billion that has quietly slipped offshore. In fact, the main
purpose of the outsourcing pilot program is to free up IRS agents to more
aggressively pursue larger tax debts.
What is particularly troubling to Uncle Sam is the ease with which middle-class
Americans can now transfer their assets to a tropical tax haven. What was once a
cumbersome and expensive way for fat cats to trim their tax burden is now an
easy, affordable and perhaps even more clandestine process than ever before. The
IRS recently investigated Equity Development Group, a Dallas-based offshore
investment company formed in 1999 that has represented some 900 clients,
primarily through its website. The investigation found that Samuel Congdon, who
the company lists as founder, was the sole employee of the company. While the
firm listed offices in Dallas and the Bahamas, Congdon admitted the latter was
nothing more than a mailbox. A Senate subcommittee that subsequently subpoenaed
Congdon’s client list concluded in a written report that Congdon “willfully
remained ignorant of his clients’ motives for moving money offshore.” That
business approach, the senators say, allowed Equity Development Group to operate
“in apparent compliance with federal law while facilitating potentially illegal
activity.” Among Congdon’s practices that the subcommittee found suspect was an
“offshore calculator” on his website that compared the difference in growth
between a U.S. investment account and one held offshore. The IRS admits that
prosecuting middlemen like Congdon can prove exceedingly difficult. That’s
because offshore accounts are typically structured to make it unclear who
actually owns them. For a fee of $6,200, Equity Development Group even
established “shelf companies” for clients who wish to appear to have been using
offshore accounts for several years. The fact that offshore account brokers like
Congdon operate on a “don’t ask, don’t tell” basis won’t help their clients
should the taxman come calling.
Although the IRS did not levy any new taxes against Equity Development Group
as a result of its investigation, it left the door open to pursue their clients.
Offshore tax strategies, risky for any investor, are particularly so for traders.
Why? Because as a trader, you have already been awarded a unique “trader tax
status” which allows you, among other things, to deduct all your business
expenses and forego the “wash rules” if you elect the mark-to-market accounting
method. Such special dispensations don’t come easily from the IRS, nor are they
worth jeopardizing by trying to shelter money offshore. Lose your trader status
and you start a domino effect that could put you out of business entirely,
depending on your tax circumstances. At Traders Accounting, we help minimize
your exposure to both taxes and risky tax-related behavior.
Remember: there are no free lunches when it comes to taxes (though we can
help you deduct a few).
Contact us today. We’ll help keep your financial ship on course and well away
from such potential calamities as offshore tax shelters.
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