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Offshore tax planning is an often misunderstood practice because it evokes images of tax evasion. This image exists because a few unethical citizens set up accounts offshore with the intent of under-reporting, or misreporting earnings and income, to the IRS. While this was a popular practice for some time, today there is better international cooperation and enforcement of tax law. If you intend on engaging in offshore tax planning, you will need to be aware of the laws regulating what is legal tax planning and what constitutes criminal tax evasion.
Offshore Tax Centers
There are many offshore centers willing to compete for your financial business on the basis of tax minimization. These centers are located throughout Europe, Asia, South America and the South Pacific. You can choose to operate an insurance company, for example, out of Bermuda to capitalize on its insurance company-friendly regulations. This is not illegal, just as it would not be illegal to set up a corporation in Delaware in order to reduce your tax burden with a company you operate in California. However, you will always have to declare your income and pay taxes. If you fail to do so, you could be held criminally liable, and ignorance is not a defense for tax evasion or fraud.
Tax Minimization
Tax minimization is a legal strategy to reduce the burden of taxes your household or your business will owe to federal, state and local governments each year. For example, you may choose to build your factory in a neighboring state to where you live because employment taxes are lower. This is legal, and some states even offer low business taxes to lure development into the area. The same is true on the global scale. However, if you are a resident of a specific state or country, regardless of where you do business, you will be responsible for paying taxes on your income to your area of residence.
Tax Evasion
Tax evasion is illegal in the United States. Evasion takes minimization a step further. It can involve omitting income from tax schedules in order to reduce your annual tax burden. This practice was once popular with offshore tax planning because some offshore havens did not consider evasion a crime. As a result, they would not provide information on income earned or stored in accounts outside of the United States. With an increase in global tax law and enforcement, there are fewer havens that will allow you to evade taxes. You will likely find your name can end up on the IRS's radar if you attempt to store money offshore and not report it as income.
Tax Fraud
Nearly every country in the world considers tax fraud a crime. With fraud, you are not only failing to report information but intentionally misreporting. If you fill out any fraudulent reports to your local, state or federal government, you are committing tax fraud. For example, failure to disclose an account held offshore could be considered evasion. On the other hand, disclosing an offshore account but misrepresenting its intent, use or balance may constitute fraud.
