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Shady havens
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July 4, 2001: 9:17 a.m. ET
Offshore tax shelters promise relief, but the risks may exceed the rewards
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - It's a tempting proposition – offshore tax havens that help you hide your assets from Uncle Sam.
There's no shortage of international banking operations that tout such tactics, most of which claim to be legitimate businesses and suggest that U.S. clients need not include money earned overseas as taxable income. The Internet has made it easier than ever to track them down.
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This is an apparatus in which the odds are built against you, and it can very well ruin you if you get in over your head.
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John Buchanan
IRS |
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A simple search online using the key words "offshore tax shelter" turns up dozens of Web sites including:
- 1st Caribbean Citizenship Program, a Dominica outfit that claims, "If you are looking for a qualified offshore service, or you want to go offshore in business registration, or you want to pay no more tax, you are in a right place to implement your desires."
- PT Club, which claims to exist "only in cyberspace," promises to help customers set up offshore tax shelters and offers other services such as quickie divorces and a way to become an "honorary" talent scout for a modeling agency, all part of its plan to help customers "be free to live normal, quiet, middle-class lives without all sorts of unnecessary laws and taxes."
- Swiss Pacific, which, through its Encenada Club, offers a "world of offshore banking, privacy, wealth and freedom," not to mention its own tropical island beach resort, where you can exercise your inalienable right to recruit models without the Internal Revenue Service breathing down your neck.
A little advice? Don't believe the hype.
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A beach in the Seychelles, which has recently agreed to change its tax laws. | |
"It's very risky, and if the IRS catches wind of it, they will investigate it and shut it down because it's a scam," said National Association of Tax Practitioners spokeswoman Cindy Hockenberry. "Some people suggest you can protect your assets in these offshore trusts. It's not true. If you're a U.S. citizen, you're taxed on worldwide income regardless of the source."
Not surprisingly, the IRS has its own opinions on the matter. Lately the federal tax-collection agency has become more aggressive in its efforts to crack down on offshore shelters, training hundreds of agents on how to find and stop abusive havens and the people who use them.
There are many different types of offshore tax havens, ranging from the very simple -- put your money in an offshore account and hope nobody notices -- to complex, tiered schemes in which a domestic trust puts its money in an offshore trust, which then puts its money in another offshore trust, which would then be treated as foreign income by the IRS.
Except that it won't.
Cracking down on tax shelters
"A U.S. taxpayer is subject to income tax on their worldwide income," said John Buchanan, program manager for abusive tax schemes in the small business and self-employed division of the IRS. "These schemes do not give you any relief from that legally."
Many investors in offshore tax schemes are caught when they try to bring their money back into the U.S., insiders say, usually with debit or credit cards from offshore banks. Promoters of these schemes, who take big fees from investors, will also often give up their investor list when caught by the IRS or law enforcement agencies.
Losing a civil fraud case against the IRS can include a penalty of up to 75 percent of the underpayment of tax attributable to fraud, in addition to the back taxes owed. Criminal convictions could result in fines of up to $250,000 and up to five years in prison.
In one particularly stern punishment, a Michigan dentist convicted in September 2000 of failing to report $1.5 million in income and hiding his money in offshore accounts was sentenced to 27 months in prison and required to pay $10,000 in fines, in addition to taxes and interest.
The sentencing judge's coup de grace was ordering the dentist to place a full-page advertisement in the Grand Rapids Press telling his story and urging others to pay their taxes.
"There's no percentage in this game," Buchanan said. "You're gambling, and there are few winners. This is an apparatus in which the odds are built against you, and it can very well ruin [you] if you get in over your head."
But the IRS has its work cut out for it. Though it's impossible to get an exact figure, experts estimate that offshore tax havens take in $50 billion to $70 billion a year.
Waffling on the OECD initiative
"It's obviously a big business," said Les Samuels, assistant secretary for tax policy at the U.S. Treasury Department from 1993 to 1996. "There are a lot of countries that market themselves as tax havens. They wouldn't be doing that if they didn't think they were getting something out of it."
And the U.S. government recently has waffled in its support of an international effort led by the Organization for Economic Cooperation and Development (OECD) to make offshore havens toe the line.
Since 1998, the OECD initiative has convinced nine countries, including the Cayman Islands and the Seychelles, to follow certain guidelines for tax policy. But U.S. Treasury Secretary Paul O'Neill wrote in May that President Bush's administration was worried the OECD's efforts could unfairly force some countries to raise their taxes.
Criticism from France and other nations caused the Bush administration to reaffirm its support of the initiative, though some OECD members say the U.S. still has reservations about the plan.
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A house on Bay Street on Harbour Island in the Bahamas, one of 32 tax havens identified by the OECD. | |
Lack of support from the world's largest economy could encourage the remaining 32 unrepentant tax havens to continue their bad practices, according to Samuels.
"This whole process of waffling and getting the attention of the Secretary of Treasury sends a signal to tax havens," Samuels said. "They could see this process (and think), 'Let's hang in there until the last possible minute because the U.S. is not going to be there supporting it.'"
Samuels, now an attorney with the New York law firm of Cleary Gottlieb Steen & Hamilton, said the U.S. has a significant self-interest in caring about this issue.
"If you and I pay our taxes, why should we sit around and let people evade taxes?" Samuels said. "It's not fair to the vast majority of law-abiding taxpayers. It develops disrespect and cynicism for the system."
If you are involved in such a scheme, wittingly or unwittingly, the IRS suggests you amend your returns now, before the penalties and interest grow even higher. If you know of and wish to report such a scheme, the IRS hotline number is 1-800-829-0433. 
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