Welcome to TaxView with Chris Moss CPA Tax Attorney
Many large public businesses have their corporate operations legally headquartered offshore. For example Apple, General Electric, Pfizer, IBM, and Merck have offshore operations legally sheltering billions of dollars from US income taxation. However, if any of you individuals or small business owners out there are ever approached with a too good to be true personal tax savings arrangement that involves offshore investing or business operations that result in you personally saving taxes on your From 1040 get a second opinion before you invest in and activate such a scheme. Once the scheme is discovered by the Government action is immediate and devastating to the promoter of the shelter. Unfortunately in many cases you the taxpayer/victim are accused of tax fraud as well resulting in severe civil fraud penalties in addition to all the additional income tax you owe. So if you have money offshore right now or are thinking about a plan that purportedly legally allows you to send money offshore, please stay with us here on TaxView with Chris Moss CPA Tax Attorney to give you a fair warning that such schemes lead nowhere but to large civil fraud penalties and in some cases criminal Government tax investigations.
Big and small business have always been able to operate abroad and save taxes. But owners of closely held businesses are not legally able to take advantage of these provisions. In fact Americans are taxed on worldwide income regardless of whether or not the funds are deposited to a foreign bank in a tax free haven. Unfortunately there are many taxpayers out there who don’t know that these schemes are illegal, like Stanley and Ruth Alexander who were in US Tax Court over this very issue in Alexander vs IRS T.C. Memo 2013-203.
The facts are very complex in this 71 page Opinion. Dr Alexander, a plastic surgeon, used offshore tax strategy to lease back his medical services to his professional Ohio practice. Alexander met attorney Reiserer from Seattle who reviewed offshore employment leasing with Alexander. There were numerous doctors who were well versed through seminars in the Bahamas about this strategy. Reiserer and a CPA Kritt “structured, implemented and managed” the offshore strategy for tax year 1996-2003 for Alexander. In 2003 the IRS initiated a criminal investigation of Kritt. Kritt was charged with criminal tax evasion, but Kritt was found not guilty by jury of any criminal misconduct.
As a result of the Kritt criminal investigation, Alexander and hundreds of other doctors were audited by the IRS for years 2000-2002 and were accused of substantial understatement of income and tax fraud. Alexander appealed to US Tax Court in Alexander vs IRS US Tax Court (2013). Alexander claimed the offshore strategy was to create retirement for his family. The Government argued that the motivation was avoidance of tax as there was no meaningful economic substance to the strategy. Judge Goeke on Page 45 of the Opinion opines Alexander relied on Krit and Riserer and Alexander had limited ability to understand the tax law. As the case unfolds the Court seems to have sympathy for Alexander who “placed a great deal of reliance on Kritt”. The Court concludes that Alexander did not possess the education that would allow him to know he should have reported additional income”. Page 50. IRS loses on tax fraud, but IRS wins on understatement.
Our next case involves Dr Child in Child vs IRS T.C. Memo 2010-58. The facts are relatively simple. Dennis Evanson designed organized and promoted schemes to shelter income from taxation. He was ultimately convicted of Federal income tax evasion by a jury in 2008. All of Evanson’s tax evasion schemes used sham transactions to transfer clients’ untaxed income to offshore entities that Evanson created and controlled. The funds were typically returned to his clients disguised as disbursements from fictitious loans to avoid taxation.
Dr Child was a highly compensated radiologist who met Evanson at a party. Evanson helped Child and hundreds of over doctors create a tax evasion scheme which allowed a fictitious offshore insurance company to providing insurance coverage for Child. Premiums were paid and deducted on Child’s tax returns from 1997-2003. The IRS audited not only disallowing over $280K of deductions but claimed Child was guilty of tax fraud as the whole scheme was nothing but a tax avoidance sham transaction lacking any economic substance. Child appealed to US Tax Court in Child vs IRS US Tax Court (2010). Judge Kroupa concluded that indeed Child fraudulently intended to evade taxes and this was liable for additional fraud penalties under Section 6663 of the IRS Code which increases the penalty by 75% of the tax owed. IRS wins and Child loses on fraud under IRS Code Section 6663.
If you lose on Fraud you owe additional 75% of the tax owed, a lot of money for most of us. So why did Child lose on Fraud but not Alexander? The law says you commit tax fraud if “badges of fraud” are present: you have inadequate records, you participate in the promoter’s scheme to mislead the Government, you give implausible explanations of behavior to conceal the fraud, you file false documents, and you fail to respond to subpoenas. Finally you don’t cooperate with the Government. Judge Kroupa in Child argued that “most of the badges of fraud upon which this Court relies were present in Child”. Page 23. Judge Goeke didn’t feel that way with Alexander and so Alexander did not have to pay the 75% fraud penalty.
In conclusion, if you are a small business owner who attends a seminar on offshore investing schemes, simply say no. There is no legal tax strategy for individuals and small business owners to keep their offshore earnings from being reported on their personal tax return Form 1040. Unless you are willing to give up your US Citizenship and leave the country there is simply no legal way to avoid paying personal income taxes by keeping your earnings offshore. Work within the system to change the tax to perhaps a flat tax or national sales tax, but say no to offshore tax schemes. You will be happy you did when the IRS comes knocking on your door for an offshore tax audit.
Thank you joining us on TaxView with Chris Moss CPA Tax Attorney.
See you next time on TaxView.
Chris Moss CPA Tax Attorney