THE HAZARDS OF HIDING MONEY OVERSEAS

For most of us, offshore tax shelters offer a good way to get ripped off and get in trouble with the IRS. If you seek them out, beware.

Immerse yourself in the world of offshore tax shelters, and pretty soon you’ll feel like you need to take a shower. I’ve yet to find an area of finance with more scams, schemes and dubious claims per square inch.

Some of the rip-offs are pretty obvious — a promoter takes your money, promising to hide it from the IRS, and either disappears with it or blackmails you for more by threatening to turn you in to the very tax agency you were trying to duck.

Others are more subtle, offering to help you set up trusts to hide assets or income, or both. Despite severe setbacks in the past three years — adverse court rulings, a meaner IRS and the capitulation of several former tax havens — these promoters keep insisting that both aims are possible for regular Joes.

There are, in fact, a few legitimate or at least quasi-legitimate reasons for venturing offshore. If you’re extremely wealthy and a lawsuit target, you could benefit from making your assets harder for creditors to snatch. Some of my Beverly Hills attorney sources have such offshore asset protection trusts created for their clients. You should figure on spending about $30,000 to set up an offshore asset protection trust and several thousand annually to keep it going.

Simpler Ways to Protect Assets

For the rest of us, these attorneys say, there’s a simpler, three-step course to protect our assets:

1.	Don’t do things, such as defraud people or drive inattentively, that get you named in lawsuits.
2.	Buy an umbrella liability policy.
3.	Call it a day.

Then there are the “hide the money” offshore accounts. Again, there are legitimate ways to reduce the taxes you pay. But concealing income in an offshore account isn’t one of them.

Simply put, as a U.S. citizen, you’re expected to pay U.S. taxes. To quote IRS Publication 54, “As a U.S. citizen or resident alien, your worldwide income generally is subject to U.S. income tax, regardless of where you are living.”

Furthermore, U.S. law requires those who have more than $10,000 in a foreign trust or bank account to report those accounts on their 1040s. If you failed to do so in the past, April 15 is the deadline to come clean and avoid serious penalties.

The Big Question: Will You Get Busted?

So the question isn’t whether you can legally hide income from the IRS in an offshore trust, because you can’t. The only question is whether you can get away with it.

In the 1990s, promoters of offshore trusts went a little nuts with claims about how easy it was to evade taxes, largely because the IRS was defanged and hardly auditing anyone anymore. A few things have changed since then, and with those changes should come some lessons:

•	A country that provides secrecy now may not in the future. Many former tax havens, including the Cayman Islands and Bermuda, have capitulated in recent years to pressure from the United States and the European Union and now share information with tax authorities. The United States and the E.U. aren’t just looking for tax evaders. They are also after drug dealers, money launderers and terrorists who have exploited bank secrecy laws to their advantage. The former tax havens decided protecting such scumbags wasn’t worth incurring the wrath of powerful nations.
•	Once a tax dodge becomes popular knowledge, the IRS will find a way to crack it. The IRS subpoenaed millions of transaction records from major credit card companies to find U.S. citizens who were using plastic to tap offshore bank accounts where they had hidden money. Hundreds of audits are already under way, and more are expected.
•	Don’t expect much loyalty from a company that’s helping you break the law. The IRS is getting client lists from investment banks, law firms, accountants and promoters who sold various tax shelter schemes, both domestic and foreign.
•	Be careful whose advice you take. Some high-profile promoters of offshore trusts are in hot water with the government. Terry Neal, author of “The Offshore Advantage,” was indicted on tax fraud charges in April 2003. Earlier, promoter Jerome Schneider, who advertised widely in in-flight magazines, was indicted on charges of mail fraud, wire fraud and conspiracy to defraud the IRS. (Both cases are still pending.)

There are still several countries, including Panama and Belize, with bank secrecy laws that could help you hide assets from the U.S. government. There are also plenty of promoters who are sure that, this time, they’ve found a foolproof way to baffle the IRS. But don’t expect to be able to check them out at your local Better Business Bureau or to cry foul to the authorities if things go wrong.

Just Leave

You do have another option if you really don’t want to pay U.S. taxes. Move abroad, take your money with you, and renounce your citizenship.

That’s what some wealthy folks, including investment manager Mark Mobius, have done. They’re no longer subject to U.S. taxes on most of their riches, although they are still subject to U.S. taxes on income that’s generated in the United States. Along with their citizenship, they give up the right to travel freely to the States or to expect help from U.S. embassies or the U.S. military if things go wrong in their adoptive countries. The decision is irrevocable, which is why it’s such a serious step.

You’ll also need to come up with a reason why you moved that doesn’t have to do with the IRS. If the government determines your primary reason for moving was to avoid taxes, it can tax you for up to 10 years after the move.

But if you really don’t think your U.S. citizenship has value worth paying for, then get rid of the darn thing, and don’t let the door hit you in the butt on the way out.