If you have an offshore account, the IRS may be extremely suspicious of your overseas financial transactions. Why? Offshore accounts may be used to conceal funds from the IRS in tax evasion schemes. According to the IRS, there are a variety of abusive offshore tax evasion schemes. However, this does not mean that having an offshore account is illegal.
Taxpayers attempt to avoid tax payments in a variety of ways, including:
- Establishing Offshore Trusts
- Foreign Partnerships
- Private Annuities In Tax Haven Jurisdictions
- Personal Investment Companies
- Captive Insurance Companies
- Credit Cards In Foreign Countries
- Bank Accounts In Tax Havens
Understanding Offshore Tax Evasion
Offshore may refer to a bank, country, or jurisdiction. When used to describe a country of jurisdiction, offshore refers to any area that offers foreign investors financial secrecy—the ability to conceal their funds and manage their bank accounts with relative anonymity. Financial secrecy refers to a level of extreme confidentiality. Some countries, called tax havens, offer American investors a low-tax or no-tax environment in which to store their funds. According to the IRS, about 40 countries across the globe advertise themselves as tax havens, attracting investors from other countries. Some countries and jurisdictions consider the United States a tax haven.
When used to describe a financial institution, offshore refers to a bank that is focused on attracting foreign investors. International Business Corporations (IBCs) are commonly used in offshore tax evasion schemes. Sometimes, taxpayers establish an IBC so that they can store funds overseas without telling the IRS. IBCs are usually built in tax haven countries that offer foreign investors financial secrecy. Because they have corporate status, it is easy to conceal financial transactions and funds stored in IBC accounts. Thus, the IRS tends to be wary of IBCs in tax havens.
