What the folks down at the IRS want you know, and quite a few things that they don't.........What the regulations say & what the reality actually is. 

In the past, the idea of setting up an "offshore Trust" or some similar type of arrangement, was only available to the very wealthy, or those with access to sophisticated financial advisors.  Today, more and more "middle class" people are finding that such "offshore" entities or tax planning is both very affordable and very accessible.......and you had better believe that the US government is scared. 
Lets face it......the middle class pay the bulk of non-corporate or individual taxes.  When they, and their money start to leave, the issue of addressing such offshore holdings in the tax code becomes a top priority.  This is why there is a fairly new dialog box on "Schedule B" of your 1040 tax return that specifically asks about offshore accounts, holdings or companies.  US citizens have been setting up offshore structures and offshore accounts for a very long time, why all of a sudden is this now a concern for the tax regulators?  I will tell you why......It is because the number of people fed up with high or unfair taxes is staggering.  Not only are they fed up, they are doing something about it.  They are leaving.  But rather than re-write the tax codes so they are simpler and fairer, or at least curb their appetite for spending the tax payers money, the US government has tried to take an even more restrictive and draconian approach.  I hate to be the one to tell them it is not working, so I won't.  In fact, it is working against them. 

Now that you know what is going on, let us discuss what some of the newer regulations or measures are to stop you from investing your money where you want, and also some of the things they are not telling you. 

Before you read further, it is important that I stress we do not advocate that our clients break the law, or do anything they know will be in violation of their respective tax code regulations.  Our goal is to make sure our clients clearly understand their options.......and there are options.  Some tax planning strategies are not addressed in the current tax regulations, and therefore fall under the "it is not prohibited under the current regulations in print" category.  This does not mean that a judge in your country will take the letter of the law seriously.  In many cases, US and other common law judges (Please read our article about Common Law vs. Civil Law jurisdictions) will "interpret" the current law or regulations to suit themselves.  This is why so many domestic structures, such as "Family Limited Partnerships", US domestic "Trusts", so-called "Pure or Liberty Trusts", and a number of other entities that would appear to be protected under the law ~ are often not worth the paper they are written on.  This is not because the law does not permit these, or even other offshore structures, but it is because the tax authorities and judges have done some very surprising things (surprising for a democracy that is).  

We have already touched upon this fairly new item on the "Schedule B".  What is the purpose of it? 
The dialog box asks if you own any bank accounts, mutual funds, investment accounts, insurance or annuity policies, or have a control interest (either in stock or as a director) in an entity that is outside US jurisdcition.  If you answer "Yes", of course you are sending a red flag to be audited.  If you answer "No", and some how are discovered to have such an account or structure, then of course they can prosecute you for perjury.  What you will discover in a moment is, most people are their own worst enemy. 

The main goal of the newer and fairly recently enacted tax legislation, is to address some of the tax planning methods or strategies that have been used in the past.  Namely, the ownership or control of an offshore entity, or a bank account in your name .  For this reason, many tax planners or other "advisors" will tell you that the formation of an offshore structure, in and of itself, will not permit you to legally escape US tax liabilities.......not anymore.   However, there are some rinkles to this that we will discuss in a moment.  

Technically, those tax advisors or accountants that do tell you there is no directly explicit way to avoid tax consequences via an offshore structure (for US citizens), are in fact correct.  What I mean by that is, the tax regulations now either address offshore structures (and the reporting of them), or you always have the wonderful legal system that will "interpret" the tax regulations in such a way, that you will be found in violation even if you set up something that is not expressly prohibited or addressed in writing.  They write the rules.  You follow the rules.  Then they change the rules because you (or your lawyer, accountant, whom ever) have found a way to gain a tax advantage.  They do not even have to formally change the rules in writing.  All you have to do is pay a tax attorney $25,000 (or more) to set something up which is in full and complete compliance with the current tax code, and then watch a judge throw the whole thing out because his "interpretation" of the tax code is something different.  
(after all, the judge knows what the intent of the law or regulation is.......he must have been there when it was debated, written and passed in congress).  Don't think so? Me either. 
    

It is important to note that there are well over 30 independant countries in the North & South American hemisphere alone....and many other indepedant countries in the world.  Each with their own tax rules and regulations, each with their own system.  

The reason why there are some specific questions on the tax forms is, in the great majority of cases, they only know about what you yourself divulge.  With regards to Bank Accounts, Mutual Fund Accounts, or any other type of investments, there are very few countries that pro-actively will send account or other information to another foreign country.  In fact, since bank accounts are tax exempt in some countries if the owner is either foreign or a foreign entity, the banks do not even report such accounts to their own government.  Why?  Because the whole issue of reporting is tax collection.  In many so-called "high tax" European countries, taxes on things like bank account interest is collected at source.  Meaning, it is the banks responsibility to deduct or net out the tax due the government directly, paying the client what amounts to his interest earned minus the tax with-holding.  The bank then sends an electronic tape or file to the government (along with tax payment of course) indicating the details of the tax payments, the owners of the related accounts, and similar information.  In the case of foreign accounts, since no tax is due, those accounts are "omitted" from the tax reporting program.  I will not list the banks or countries that operate this way for obvious reasons, but just keep this idea in mind.  In reality, it would seem then that reporting is somewhat voluntary.  Well, not really vountary because the regulations say that you must report, but on the other hand.......if you don't, neither will anyone else.........An interesting moral dilema.  

Another important point centers around tracking.  If the offshore bank does not report customer accounts, they also do not report movement.  The meaning is (and what the tax authorities do not want you to know), once it's gone........it's really gone (also read "dirty little tricks" below).  What they honestly do not want you to know is, it can be virtually impossible to do an accurate assessment of "tax liabilities" once the assets are "out of the system".   Once your money has "left the gate", it is awfully hard to put it back in the barn.  Now you know why they are a little nervous about you taking your money away......... 

Along with this, it is important to bring in offshore mutual funds into the discussion.  When I use the term "offshore mutual funds", I am of course referring to well know funds, such as offshore funds from Fidelity Investments, Govett Asset Management, GT-Global, Mercury, and a number of other investment companies domiciled in the Bahamas, Isle of Man or elsewhere.  These are companies that offer mutual funds domiciled in a jurisdiction that does not assess capital gains or other taxes, are often are not required to report any account information to their local government either.  Here is where it gets really, really interesting.......  

For starters, it is not just about taxes.   

In the case of many Mutual Funds from the Isle of Man or Europe (Luxembourg), these investment firms have purposely chosen not to register their funds with the US Securities & Exchange Commission (S.E.C).  Why not?  Well, since many of their clients invest with them because of the tax advantages and privacy (non reporting) they provide, an S.E.C registration means a de-facto compliance with US tax regulations regarding mutual funds.  Many are not required to send an annual list of their investors, account balances, etc., to their own local government, why the heck should they turn over such information to the US.  In this, here is the rub (or stated another way: What you did not know about the US government).  Because of the non-reporting issues, the US government has put so much pressure on these companies, that many now have the policy they will not accept US citizens as clients.  Some will not even mail an account application to a US address.  It is not that they do not want new clients, they are just tired of being hassled by Uncle Sam.  However, they will gladly accept an offshore entity as a client.  So, if you want to invest in such funds (and quite frankly it is a good idea), you must do so via a Panamanian Foundation, Belizian IBC, or with what-ever offshore structure you have established. 

Privacy, Asset Protection & Dirty Little Tricks. 

The issues we have discussed about non-reporting are simply one part of puzzle.  In order to gain true privacy and protection, investors should consider the idea of an offshore entity for the "other" benefits.  Regardless of if you believe it or not, the US government does not play fair.  Not when it comes to taking your money away from you.  The tax authorities of some other governments are not nice guys either, but for some reason, the IRS seems to be the worst.  With respect to domestic issues, they often will freeze your bank accounts and generally wreck havoc with your life, all without the due process of law (or a hearing first to determine if in fact you have a tax liability or not).  After they have put a "freeze" on your money, then they say "let's talk" (my way of saying.......come on down for a tax audit).  Without your money, you probably cannot even pay a tax lawyer a retainer to go with you (they usually want something up front).  So, that being the case, what is the story with offshore money?    

The majority of so-called tax haven jurisdictions do have some form of account privacy regulations codified into local law. Some are stricter (better) than others, but in theory anyway, your privacy is protected to some extent.  In the case of some jurisdictions, non-criminal complaints (such as divorce or a tax liability in your home country) are not a valid reason for a judge in the place you do your banking to order that account secrecy be broken.  The friendly folks at the tax authority know this, so what do they do? They push the "hot button".  Meaning the one thing that will give them access to your bank or investment account (through a local court order of course).  What is the "hot button" ?  That one unilateral agreement that almost all countries have signed for the betterment of man kind everywhere - The "Drug Trafficking & Money Laundering" agreement.  It does not matter that the strongest drug ever to pass through your hands is aspirin, this is what they will say about you.........and why is a good idea to arrange your affairs so you at least you have a fighting chance.