A number of years ago, it was legal to put money into
an offshore trust or foreign corporation and defer income taxes earned by the
trust or the corporation. That's no longer true, but there are still some
lawyers and others who advocate using foreign structures to save taxes. I
have yet to see more than a very few of these arrangements that would stand
up to the scrutiny of an informed IRS agent. If challenged in a US court, few
of these schemes would hold up.
Having said that, there are a number of legal ways that
US citizens and residents can invest outside the US without getting into a
hassle with the IRS. Basically, any tax deferral method that will work in the
US will usually work outside the US. An example is the tax deferred variable
annuity. Another example would include investments in foreign operating (non
investment) corporations. In some cases, foreign life insurance offers some
tax benefits outside the US, just as domestic life insurance may provide some
tax benefits in the US.
In addition, there are special exemptions available for
US citizens who work and live in a foreign country. Up to $80,000 a year (for
the year of 2002) can be excluded from tax. If a husband and wife are both
working abroad, they could earn up to $160,000 a year - tax free. This break
can also be used by the self employed where the business is a service
oriented business.
But those who tell you that you can form a foreign
trust and/or a foreign investment corporation and can thereafter quit paying
taxes on the income earned by those entities are leading you down the
"primrose path". You might be lucky and might never be audited. But if you
are, the IRS auditor will almost immediately refer your case to a specialist
in this area of the tax law. Before long, you will be talking to a lawyer
about whether you want to settle and pay some huge penalties or whether you
want to argue the case in court. It's extremely unlikely that a knowledgeable
US tax attorney will encourage you to pursue the matter in court.
In addition to my work as a tax consultant, I publish a
variety of research reports on
Global Asset Protection and
Offshore Tax
Strategies to help educate interested investors, business owners and
their financial advisors about how the US taxes offshore transactions. J.
Richard Duke, a tax lawyer specializing in international tax law, and I have
compiled an extensive 600+ page (8.5 x 11)
seminar manual
for beginners on the U.S. tax treatment of crossbred transactions. We also
present a t two day
intensive seminar on the subject for those for those who have no prior
background in tax law.
It is possible to save taxes offshore by combining
domestic tax planning with offshore structures for asset protection or
business or investments.
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