Entries Tagged 'Tax shelters' ↓

The Liechtenstein tax evasion drum has been beaten by the German tax authorities and German tax evaders are running for cover. It’s time for U.S. residents to listen to the rhythm.

Marketwatch has published an article, “Offshore-Account Holders Bite Their Nails“, which shows the pressure being imposed on U.S. residents. It also contains a quick overview of how you (hypothetically, because of course YOU would never be a tax dodger, would you? :-) ) can clean up this mess if you didn’t disclose off-shore assets:

• Pretend there isn’t a problem and cross your fingers (the “ostrich” approach);
• File amended tax returns (and other forms that might be required) quietly, pay the taxes, and hope things don’t blow up too badly (the “quiet disclosure”); or
• Hire a lawyer who goes and talks to the IRS to work out how you come in from the cold in a pain-minimizing way. (the “noisy disclosure”).

None of this is new. And the IRS has long had a particular affection for chasing people with hidden offshore income.

WHY DELAY HURTS TAX EVADERS–EFFICIENCIES

It’s a glacial change. Slowly but surely it becomes easier for the tax authorities to see hidden money. This happens because information technology gets better. So just like better instruments help astronomers find black holes, so does better IT help the tax authorities find the money that’s not there.

The longer you wait, the more probable it is that tax evasion will be discovered, simply because of business efficiencies built into the financial systems.

WHY DELAY HURTS TAX EVADERS–YOU CAN’T SPEND IT ALL

Let’s say you stick $1,000,000 in an offshore bank account and don’t declare the income. Invest wisely. Years go by. Now you have $10,000,000.

If your strategy is “I will travel abroad and spend the money while travelling”, then my humble suggestion is at some point the money in the bank is simply too much for you to dissipate in dissolute living, cruise ships, five star hotels, and haute cuisine. There’s a lot of money, and you’re decades older. You can’t party down the way you used to.

I’ve seen this situation in my law practice, by the way.

WHY DELAY HURTS TAX EVADERS–MORE PRIVACY LEAKS

The recent events in this department of international tax has been triggered by privacy leaks, either by disgruntled ex-employees and paid snitches. Humans will continue to do things they aren’t supposed to. If you are relying on those humans to keep your information secret and keep you out of jail, you’re on a fool’s mission. The longer you wait, the more likely it will be that one of these leaks will affect you.

WHY DELAY HURTS TAX EVADERS–TARGETED INVESTIGATIONS

Look at how the IRS went after tax shelter investors: (1) find the tax shelter promoter; (2) get the promoter’s client list; (3) bring the hammer down on the tax payers who bought that tax shelter.

Look at how the IRS goes after abusive trust arrangements: (1) find the abusive trust promoter; (2) get the promoter’s client list; (3) bring the hammer down.

Now think for a moment. Who is the “promoter” in these offshore banking arrangements? Answer: easily visible banks in easily identifiable countries. The IRS is already moving on step 2 in the equation.

RECOMMENDATION

At the risk of offending everyone, here’s my advice.

If you have undisclosed income and assets (offshore or not), repent and come to Jesus. Figure out how you’re going to square things up with the tax authorities, and do it.

Don’t turn a money problem into a jail problem.

Every so often I get people wandering into my office to talk about offshore trusts, estate planning, and saving tax. Some of them utter the following phrase, “Well, how would the government ever know that I have money offshore?”

I tell them that if they plan to lie about their taxes why should they spend a gob of money on legal fees? I tell them the cheapest tax shelter is to just lie. They just sort of look at me blankly or do a nervous giggle. Then they go away and I never hear from them again.

Yet another example of how secrecy fails

The latest warning is floating through the interwebs right now.

I came across it on my favorite website. It is the story of Bank Julius Baer, a disgruntled former employee, and a bunch of Southern California litigators who, well, let’s just say they seem to be pursuing the impossible.

The lawyers seem to be attempting to erase information from the internet, an action that triggers the Streisand Effect and is about as feasible as trying to take the pee out of the pool. I’m guessing that they see that now.

In the middle of this giant moronathon are a bunch of normal rich folks whose names are now spread all over the web. These are people just like our customers. (I refuse to use the word “client” because I think it smacks of lawyer ego, self-generated arrogance, and clubbiness. They are customers. We’re a business. Get over it.)

The 30 second overview

Here’s the Slashdot article about the whole mess. From here you can follow all sorts of links to information and documents. Read the comments, too. The comments are the reason Slashdot is so much fun.

There’s a website, www.wikileaks.org, that acts as a whistleblower resource.

In early 2008 it received and posted a load of documents from a whistleblower and former employee of Bank Julius Baer. The story can be found at endless links in the Slashdot article, or here.

I don’t know (and I don’t care) about the details of the case. I don’t care who is right and who is wrong. The point I want to make is directed to the kind of people that I work with.

Secrecy fails

That’s my point.

The Bank’s customers have their names splayed all over creation via the interwebs. It was trivial for me to download the documents from one of the hundreds of mirror sites that have this information. I looked at it. Hey! It’s fun! You can do it too.

Does Bank Julius Baer deserve the accusations thrown at it? I don’t know. I don’t care. The only thing to take away from this little escapade is that there may be confidentiality, but there is no secrecy.

Ask not for whom the whistleblower leaks. He leaks for you.

Life is too short to convert a money problem (paying taxes) into a jail problem.

The IRS has new rules in effect (”Circular 230″) Government regulations inexorably introduce bureacracy and risk-avoidance into business. A business will over time change from an entrepeneurial activity creating value for its customers into a risk-avoidance paper factory. We’re seeing a little of this happen right now in the tax realm.

After the jump you’ll find a copy of a letter that will be going out to all of our clients in the next few days. Continue reading →

The IRS has put the universe on notice that another tax shelter is off limits. Sane people would have held their noses and walked away even without the warning from the IRS.

The scheme involves an S corporation and a friendly tax-exempt organization. Through a manipulative set of transactions, 90% of the S corporation’s stock is transferred to a tax-exempt organization. Hmm. Charitable deduction for donor. Because the tax-exempt organization owns 90% of the stock, 90% of the income is attributed to the tax-exempt organization. It pays no tax on this income. However, the S corporation doesn’t distribute cash to its shareholders, so the tax-exempt organization doesn’t get any cash.

Later, the transaction is unwound, so that you (the clever tax shelter purchaser and real owner of the S corporation) buy back the stock from the tax-exempt organization at a pittance.

Here’s how I look at these deals when they float by me. First, I look at who’s getting paid what. If there’s someone in the transaction who appears to be there solely to collect a big check, it looks stinky. (That person is the promoter). Watch the money.

Second, I just check my gut. If my little heart starts to go pitter-pat with excitement, and I think, “Ooooh, so clever!” with envy at the intellectual prowess of the person who thought up this plan, I pause. (You know the old advice, “. . . we pause when agitated or doubtful . . . .”) The excitement and envy of intellect tell me that this transaction might have been manufactured in the abstract universe of the Internal Revenue Code, not the real world of business transactions.

Taxpayers have been on the receiving end of a good deal of pain in the last few years over income tax shelters. Much of that pain is well deserved–many of these “investors” (cough, cough) left common sense in their other pockets when they went shopping. And don’t get me started on the purveyors of these schemes.

But I digress.

I know you’ll be shocked to hear this, but there are tax shelter schemes in the estate tax world as well. People don’t want to pay estate tax just as much as they don’t want to pay income tax. (Maybe more–to pay estate tax you have to DIE, after all. Income tax means you’re still alive, at least.)

Well, we have a warning that the the IRS is going to crank up the pain machine for estate tax shelter schemes.

Here’s an excerpt from today’s Tax Notes Today, letting us all know that the IRS will be looking at taxpayers going for estate tax savings via gimmicky and questionable schemes.

At the American Institute of Certified Public Accountants conference on November 1 and 2, a Treasury official warned practitioners to expect a continued crackdown on many of the mechanisms being used to reduce estate tax liability, particularly those involving charities.

“A lot of that has to do with various charitable kinds of gifts, and the potential abuse of exempt organizations,” said Catherine V. Hughes, estate and gift tax attorney-advisor in Treasury’s Office of Tax Policy.

Hughes said the returns of exempt organizations from 2000 would be examined during 2004 and 2005.

“Part of the reason for this initiative actually came from pressure from the Hill,” she said. The Senate Finance Committee over the last year held both a hearing and a roundtable session to examine tax evasion in the charitable arena.

“The Hill has been looking hard at the issue of compensation,” Hughes said. Accordingly, the IRS will be paying special attention to questionable compensation for employees of exempt organizations, she said.

The Senate Finance Committee will continue looking into legislative fixes as well, she said, “no matter who wins the election.”

The IRS website contains a Son of Boss Settlement Initiative FAQ page, if you’re interested in what their settlement position is. Your other choice is Tax Court litigation. Not a pretty choice, unfortunately.