- A Presumption of Tax Guilt

Frustrations In Taking Your Earnings Offshore.



On this post, friend of this blog, and frequent commenter Mark has said that he would:

“get really scared when I hear somebody suggesting a tax be levied on people who move out of the country.”

Well Mark – start trembling. I looked into moving my income offshore last year (just to be on the safe side) and here are some of the details of that depressing exercise.

First, if you are a US citizen, your incomes is taxed everywhere, forever. We are (to my knowledge) the only country that does this. Earn it in anywhere in the world, and not only do you owe taxes to the place where you earned the money, but you also owe them to Washington.

If you give up your US citizenship, you’re still taxed on your income for the next 10 years – unless the courts decide that you’ve given up your citizenship ‘in order to’ avoid taxes. If that’s the case, you’re charged with felony tax evasion and will spend years in prison. It isn’t that way for corporations however. Corporations can be founded in foreign domiciles, but if they want to business with US companies, then they need a US tax number, so they can pay US taxes on the money earned there.

Suppose you are one of those people who can restrict his business so that it would work to have a foreign corporation that only does business outside the US. Then there is no tax Id and no taxes right? No – no good. If you’re a US citizen and you own more than 5% of any offshore corporation, then it’s considered a ‘personal holding company’ and you are liable for income taxes on the portion of the corporation’s revenue that you own. If you own 5.1% of Siemens Corporation, a multi billion dollar German industrial conglomerate, then you are personally liable for 5.1% of their revenue to the US tax system. (Although in that specific case you might want to fight that one out in court – and the fact that it’s publicly traded might be an out – I’m not sure.)

Anyway, by now you’re surely saying “Hey Tom – don’t those paragons of civic virtue the Kennedy’s and the Kerry’s keep all their wealth offshore?” Yes – they sure do. That’s ‘wealth’ not income. It’s stored in a trust, in the British Virgin Islands – a Caribbean tax haven. Wealth is tougher to track than ‘income’ and it’s easier to protect. Once you make the money and pay your income taxes on it, you can protect the rest from ‘changes’ in the tax code. And knowing that can also give you the confidence to go on TV and demand higher taxes on ‘the rich’ knowing that your personal wealth is completely safe and won’t be affected.

If that makes you ask – “Why not put your offshore corporation in a trust?” Trust me, it won’t work. From what I’m told, the US tax court isn’t like the criminal or civil courts. The presumption of innocence doesn’t apply. It’s a question of legal and accounting opinions, and my understanding from lawyers who should know is that if you try to shield your regular income behind an offshore trust then the tax court will simply ‘disallow it’ and you become liable for the tax regardless of the structure. I was told that they will want you to account for you ‘time’ within the border of the US, and will make any income from ‘productive activity’ taxable no matter what legal structure protects it.

AHA! You say… I’ll simply leave the US. I’ll work offshore for an offshore corporation shielded by an offshore trust, and I’ll only do business with foreign corporations.

There is still a problem. The US government has compelled virtually all other countries to report banking transactions by American citizens. Those transactions will be monitored and if you do something which looks to the US tax courts like you’re earning a living, then you will be tried (in absentia if necessary) in US tax court and if you ever return to the US you’ll be sent to prison. If there is enough money involved, the state department will even extradite you. What you don’t pay in taxes, you’ll have to pay in political contributions to keep the state department from pressing the issue.

There are other things that people have tried too but they all fall under the heading of preventing the US authorities from knowing what you’re doing. This is profoundly difficult in an electronic age. People have dual passports, and do offshore business with only their non US identity, or put everything in the name of their wife who is a foreign national with all the structures previously discussed. Both are inherently dangerous though because they go over the line of ‘evasion of taxes’ as far as the courts are concerned, and have been successfully prosecuted already by the IRS.

There is also something called a Panama ‘bearer corporation’. This works like a ‘bearer bond’ where you own the company if you’re in possession of the documents and there is no paper trail associating your name with the actual ownership. This effectively obscures you, but it’s a red flag for the US tax courts and will probably result in one of those ‘presumption of guilt’ issues when you are trying to defend yourself. If you have a Panama bearer corporation tied up in your business, they’re going to make you prove that you don’t own it. Ask any accountant how tough that is. At the very least you’ll have to perjure yourself by claiming in court that you don’t own it when you really do.

Even with all these effort’s having failed in the US courts, the presumption of guilt, the foreign reporting, the ambiguous citizenship, there are STILL other things that people have tried. There are insurance products designed to provide access to a cash flow while obscuring its specific legal ownership. There are elaborate schemes involving countries which report banking but not ownership, acting as domicile for business from other countries which report ownership but not banking. But at the end of the day, they all amount to ‘Tax Evasion’, and the more complex the structure, the harder it is to pass it off as a simple mistake.

There are other mechanisms – things I can’t mention in this format because to my knowledge the government hasn’t caught on to them yet. But none of them is completely without risk, and the government will eventually catch on to all of them. I personally believe that if you’re really motivated, it’s not that tough to stay ahead of the IRS. They’re just federal bureaucrats after all – not the sharpest tools in the accounting shed. But they’ve shut down all of the easier routes to protect yourself and your income. Anything that’s likely to work will involve substantial effort, inconvenience, and risk.

With taxes almost certain to skyrocket in coming years, this will become a big business though. And that means there will be lots of less legitimate people trying to scam you on it. There is already a fairly large contingent of con men promising guarantees in places like the Bahamas and the BVI. But if you violate US tax law what do they care? They’ve gotten their fees – and they don’t live here. You’ll go to jail and they’ll still be making a living promising other people protection that they cant’ provide. If you’re going to try something like this, you really need to do your very best to make sure the person you’re dealing with is legitimate. But if their idea seems inexpensive or easy, then it’s obviously a fraud.

The long and short of it is that if you are going to try to shield income from taxes, then it’s going to be expensive. And that means that it will require a large amount of money to make it worthwhile or you might as well just pay the taxes on it. And because that’s so, as usual, the middle class simply gets screwed. Kennedy and Kerry et al have the family rum running revenue safely tucked away in a tax haven, but you and I still have to pay and pay and pay. There is no escape. Not really. And if you’re going to try it, then you had better be ready to burn your boats on the beach – because it may very well end up that you can’t come back here - ever.


BTW, know there are a number of lawyers who read this blog, so let me say right now, I'm not a lawyer, or an accountant, and that it's illegal to evade taxes. If there is a legal way to protect income, you had better get it from someone who knows - not me. All I'm doing is relating some of the information I was given by experts, in the hope of discouraging people from trying these ideas on their own.