Abusive Offshore Tax Avoidance Schemes - Questions and Answers


Q. What is so important about "Offshore Transactions?"

A. In recent years, a significant increase in offshore activity has been noted among U.S. taxpayers. More and more taxpayers have been observed attempting to "expatriate" their income and assets. Numerous schemes have been devised in which the true ownership of income streams and assets has been hidden or disguised. In this fashion, substantial amounts of financial activity have been improperly shielded from the U.S. tax system. "Offshore Transactions" generally involve activities in jurisdictions (commonly called "tax havens") that offer financial secrecy laws in an effort to attract investment from outside its borders.

Q. I keep hearing about "Foreign Trusts." Is that what this is about?

A. Yes and no. Initially, the need for enhanced "offshore" compliance efforts was determined as a result of noncompliance observed in numerous trusts. Trusts lend themselves to being the type of entity through which income and assets are more easily hidden or disguised. Because they are flow-through entities, the facts behind true ownership of income or assets may be difficult to establish. Secrecy laws found in most tax havens only compound this difficulty. Many different foreign entities and schemes are being promoted and used by U.S. taxpayers to evade tax. The list includes the use of:

  • Foreign trusts
  • Foreign corporations
  • Foreign (Offshore) partnerships, LLCs and LLPs
  • International Business Companies
  • Offshore private annuities
  • Offshore private banks
  • Personal investment companies
  • Captive insurance companies
  • Offshore bank accounts and credit cards
  • Related party loans

It is important to note that the list is not all-inclusive. Promoters of such schemes always appear to be "improving" the products and services that they market.

Q. What is a U.S. person?

A.  IRC § 7701(a)(30)  defines a United States person to include:

  • A citizen or resident of the United States;
  • A domestic partnership;
  • A domestic corporation;
  • Any estate (other than a foreign estate, within the meaning of paragraph (31)) and
  • Any trust if:
    • A court within the United States is able to exercise primary supervision over the administration of the trust, and
    • One or more United States persons have the authority to control all substantial decisions of the trust.

Q. The information presented by the promoter sounded legitimate. Now I have concerns regarding this promotion. Who do I contact to report information on the promotion and promoter?

A. Contact the Internal Revenue Service at 1-866-775-7474 or e-mail the Tax Shelter Hotline at irs.tax.shelter.hotline@irs.gov.

Q. Can I get more information on the Internet?

A. Yes. Additional information is available at the following IRS websites:

  • The Criminal Investigation site Tax Scams/Fraud Alerts provides information on tax scams and explains how to report suspected tax fraud.
  • The Abusive Tax Shelter site provides information to help identify some red flags that may be present in an abusive tax shelter.
  • The IRS Newsroom's page on Tax Scams/Consumer Alerts describes a number of common tax scams. If any of these apply to your investment, you should consult a tax professional not involved in promoting the investment. Or you may contact IRS to determine how it will treat such a promotion.

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