Offshore Tax Havens (2018) – IRS Dangers of Foreign Income & Accounts

Offshore Tax Havens (2018) – IRS Dangers of Foreign Income & Accounts (Golding & Golding)

Offshore Tax Havens (2018) – IRS Dangers of Foreign Income & Accounts (Golding & Golding)

Just because you invest overseas into offshore accounts, assets, etc. does not mean you have committed any wrongdoing.

There is a major difference between intentionally investing money into an Offshore Tax Haven in order to illegally avoid U.S. Tax, as opposed to legitimately investing into the global marketplace.

Offshore Tax Haven

A distinction must be made between an offshore tax haven, and moving money offshore.

While when most people think of the term offshore, they conjure up visions of sipping Pina Coladas in the British Virgin Islands, Caymans or the Bahamas, the IRS sees it differently. The IRS likes to use the general phrase “offshore” for money that is located out of the United States borders – even when it is completely legitimate.

In other words, simply moving money offshore is not the same as investing in offshore tax havens, and we will take an opportunity to explain the difference – and hopefully you can breathe a sigh of relief. If not, and believe your are about to hyperventilate — take a deep breath and contact us for a Reduced Fee Offshore Voluntary Disclosure Initial Consultation.

Moving Money Offshore

If you reside in the United States and you have money outside of the United States, the IRS would likely categorize your money as offshore. Therefore, if you happen to be originally from China or Taiwan and amassed a bit of a fortune before relocating to the United States, from the IRS’ perspective you have offshore money in Taiwan.

In reality, you are a citizen of a foreign country who now resides in the United States but did not sell your foreign assets or cash out the bank accounts. The point being, that just because something is considered offshore — does not mean it is bad.

Let’s take a very common example for our typical client from Hong Kong:

Example of Legal Money Sitting Offshore

David is originally from Hong Kong. He operated multiple businesses when he lived in Hong Kong, and two of them are used to hold investments and collect dividends. In order to provide a layer of anonymity, when he initially opened his Hong Kong PVT Limited, it was owned by a BVI. A BVI is a common structure involving the British Virgin Islands, and the reason why it was so popular, was because until 2009 it was very easy to own shares that were unregistered to any individual name in particular (aka “Anonymous”)

David Relocates to the U.S.

David is now a Legal Permanent Resident of the United States. Since there was no reason to get rid of the BVI, or sell the assets (they are profitable), David continued operating his Hong Kong investment company through the BVI.

David is Audited by the IRS

David is audited by the IRS and they begin to delve deeper into his asset planning and tax structuring trying to corner David, and make him believe he did something improper – aka owning his foreign company through a BVI.

In reality, David had this business set up long before he ever stepped foot in the United States. He only relocated to the United States because his children are attending college and they are planning to work in the United States thereafter.

This is not an example of moving money to an offshore tax haven. This is an example of an astute foreign investor owning his foreign business under a legitimate foreign holding structure, which was put in place long before he came to the United States.

Scott’s Offshore Tax Haven Investment

Scott is originally from the Austria. Scott now resides permanently in the United States, and has a sizable investments (including a pension) from his time working in Austria. Scott doesn’t want the United States to get any crack at any of the money of which he will soon begin taking distributions from the foreign pension.

Therefore, Scott purposely moves his money into a foreign retirement scheme in Malta, which if Scott was not a US person would grow tax free — along with tax-free distributions. The company sells Scott on the fact that they would not be reporting Scott to the United States.

Two Main Concerns for Scott


FATCA is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 110 countries have entered into agreements with United States to provide account holder information to the IRS. Moreover, more than 300,000 foreign financial institutions have also agreed to report information to the IRS.

Therefore, while the particular investment fund may not report Scott, in order to get the money from Austria to Malta, it has to pass certain avenues, and at any one of those potential stops, the money could be reported by either the initial bank or facilitator bank used to transfer the money, or any other hands that touch the money (investment advisors, financial planners, etc.)

Scott may never know he was reported. 

Offshore Tax Fraud

Each year, the IRS publishes a dirty dozen list and offshore tax havens are a mainstay. The IRS is pursuing offshore tax evasion and tax fraud intensely. That is because the IRS has the authority to issue monstrous size penalties against individuals if they are not properly in international tax compliance.

By purposely investing in offshore tax haven in order to avoid detection by the IRS, if the IRS was to become wise to the investment, not only are they able to pursue willfulness penalties that may reach 100% value of the accounts, but they may consider referring the matter for a criminal investigation to the IRS special agents.

Already out of U.S. Offshore Tax Compliance?

If you already out of compliance for either having not reported foreign/offshore accounts and/or intentionally invested in something you believe was a tax haven to avoid offshore reporting, you may consider voluntarily getting into compliance to one of the approved IRS offshore voluntary disclosure programs.

IRS’ New International Tax Enforcement Group 

In order to try to hedge its bets and put itself in the best position to try to collect as much money as possible, the IRS is focusing in large part on international tax – and specifically on penalizing individuals through tax enforcement.

Welcome to the IRS’s new International Tax Enforcement Group program.

New International Tax Program

Prior to 2014 and the enforcement of FATCA (Foreign Account Tax Compliance Act), the IRS has less resources to obtain information regarding your offshore, or foreign accounts.  Many foreign financial institutions were simply not reporting US account holder information to the IRS – and why would they? It’s not as if the Foreign Financial Institutions care about what the IRS thinks….until the introduction of FATCA.

Under FATCA more than 110 foreign countries (50 more countries than the US entered into income tax treaties with) have entered into IGA (intergovernmental agreements) with the IRS to promote reciprocal reporting of account holder information. Primarily, it means your Foreign Financial Institution will probably be reporting your account information to the IRS.

Likewise, more than 300,000 Foreign Financial Institutions have agreed to proactively report this information to the IRS. In fact, even financial institutions in countries that have not signed IGAs are apparently reporting as well (in order to stay in the IRS good graces).

Golding & Golding, A PLC

We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.