Good International Tax Planning or Evasion?
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International Tax Planning Techniques
International Tax Planning Techniques: When it comes to taxes and the Internal Revenue Service, there is oftentimes an inherent fear that every mistake or undecided tax position a person takes is somehow tax evasion — it’s not. These concerns are only amplified when a Taxpayer conducts some preliminary research on Google and comes across the unnecessary fear mongering websites that make it seem like every mistake is a form of tax evasion. While tax evasion is a crime, tax avoidance is simply good tax planning. Especially in the realm of international tax, in which there are multiple tax treaties to consider — along with two or more very different tax systems attempting to align for purposes of US tax and reporting — taking a firm (but supported) tax position is a legal form a tax avoidance — and not taxation. Each year, the IRS takes certain tax positions on matters involving international tax and offshore compliance in general — although these positions may change over time. Let’s take a look at a few examples of the differences between tax evasion versus tax avoidance in the realm of international tax.
Taking a Tax Position Based on Treaty
Let’s say a US Taxpayer is trying to determine whether or not a US tax treaty absolves them from certain taxes in the United States, because they are a permanent resident — but they reside overseas in a treaty country. The taxpayer conducts their own due diligence and determines from their own rational and reasonable thought process, that a certain type of income — let say foreign pension — should not be taxable to them in the US, since they are a Lawful Permanent Resident residing outside the United States in a treaty country — and that is the position they take on their tax return. Based on this analysis, and the fact that the Taxpayer conducted due diligence, if the IRS was to come back and dispute the position — and presuming it is neither frivolous nor unreasonable — this would be an instance of tax avoidance and not tax evasion.
Foreign Accounts to Leverage
If a US Citizen decides they want to open up several foreign accounts across the globe in countries that they have no other relationship with other than the fact that they believe investments in these countries will be profitable — that is not illegal. If the taxpayer also believes that certain treaty benefits may help them avoid certain taxes in the United States — this is a form of tax avoidance and not tax evasion.
Why?
Because the Taxpayer is not seeking to invade or illegally not pay tax in United States; rather, the taxpayer simply seeking to maximize their tax position leveraging their investments.
Foreign Accounts to Move Money Offshore
In contrast to the paragraph above, if the same taxpayer seeks to avoid the probing eye of the US government by opening offshore accounts with the intent of escaping or minimizing US taxation by simply not reporting the income generated from the accounts — because they believe the Internal Revenue Service will not be able to locate the accounts outside of United States — this is a form of tax evasion and it is illegal. That is because the taxpayer is seeking to artificially reduce their tax rate by hiding income.
Moving US Money Overseas to Launder
If the taxpayer has committed a crime in United States or elsewhere, and wants to take that dirty money from a legal means and moving overseas so that it can be laundered and turned into clean money — that is an example of tax evasion. Even if the money that is now generated from overseas is legal and enjoying certain tax benefits afforded to US taxpayers who are earning that type of foreign income — it does not matter, because the origin of the money was from illegal means.
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