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Offshore Tax Avoidance - What's All the Buzz?

Federal criminal tax prosecution hit a ten-year high in 2010 largely due to a continuing crackdown on offshore tax evasion. IRS data shows a 25 percent increase from 2001regarding cases referred for prosecution (USA Today, 4/17/2011). The IRS website lists the names of 25 individuals who have collectively paid more than $37 million in penalties relating to hidden offshore accounts. Large, well-known companies are making headlines associated with offshore profit shifting and other foreign tax schemes aimed at lowering their tax. Identification and enforcement is on the rise. Those with unreported offshore income certainly have cause for concern.

IRS is nearing the end of its Offshore Disclosure Initiative, which allows taxpayers to file amended returns to report offshore income, pay tax, interest, and a 20 percent penalty to avoid criminal prosecution. Some different types of entities and arrangements being used in Abusive Offshore Tax Schemes include:

  • Foreign trusts.
  • Foreign corporations.
  • Foreign (offshore) partnerships, LLCs, and LLPs.
  • International Business Companies (IBCs).
  • Offshore private annuities.
  • Private banking (U.S. and offshore).
  • Personal investment companies.
  • Captive insurance companies.
  • Offshore bank accounts and credit cards.
  • Related-party loans.

Those taxpayers who have filing requirements in California and participate in IRS's Offshore Disclosure Initiative must also file amended returns for California. Now with California's Voluntary Compliance Initiative 2 (VCI 2), taxpayers can file these amended returns without a 20 percent penalty. Under VCI 2, taxpayers who underreport income from offshore financial arrangements or from abusive tax avoidance transactions can file amended returns with us between August 1, 2011, and October 31, 2011, pay tax and interest, and avoid most penalties and criminal prosecution. We cannot waive the Large Corporate Understatement Penalty and the Amnesty Penalty.

After October 31, 2011, a variety of penalties will be added to any amended return or assessment made by us relating to offshore financial arrangements or abusive tax avoidance transactions. To assist in the identification of reporting differences, the IRS shares information with us.

Back to June 2011 Tax News