Opinions on this tax avoidance scheme - Updated

[PoloShirt]

Originally posted by: Descartes
Because if you withdraw money from the accounts of a company anywhere, it's income to you. The company providing you with the money is therefore required to deliver a 1099-DIV (or similar) for you to report on your personal income taxes. If you do not, it's tax avoidance. It's as simple as that.

Uhh, then don't withdraw anything! Buy everything on corporate accounts at foreign retailers.

 

[JS80]

Originally posted by: dullard
A friend complains about personal income and payroll taxes. He owns his own small business. He needs to form an LLC for other reasons, but thinks he might as well form the LLC off-shore to avoid any corporate taxes (several countries will do this with no taxes). All profits would be shown in the other country, and thus the LLC wound have no taxes.

Then, instead of paying himself a salary, he would borrow money from the company with a 0% interest loan. He'd never have personal income, and thus never pay taxes.

I see many likely problems with that situation, but I can't persuade him. So, can ATOT come up with a big list of reasons why that could come back and haunt him?

Doesn't work. The IRS will deem the 0% loan as salary and tax him. There is no way to avoid this. Besides, even if it's a foreign corporation, if money is earned in US soil, you have to pay US taxes.

 

[dirtboy]

While he can do this, it is completely illegal to use it as a means to avoid taxes. Just because a LLC is offshore doesn't mean you don't have to pay taxes. Any good attorney who specializes in offshore trusts will no this.

The big question I want to know, is how is he going to get the money offshore to make this scheme even work? lol Does he think he can just move money to an offshore trust without anyone noticing? Not to mention that every offshore trust has an onshore component. Oops.

 

[Descartes]

Originally posted by: PoloShirt

Originally posted by: Descartes
Because if you withdraw money from the accounts of a company anywhere, it's income to you. The company providing you with the money is therefore required to deliver a 1099-DIV (or similar) for you to report on your personal income taxes. If you do not, it's tax avoidance. It's as simple as that.

Uhh, then don't withdraw anything! Buy everything on corporate accounts at foreign retailers.

LOL! Ok. Go for it and let me know how that works out for you.

 

[Fern]

Originally posted by: dullard
A friend complains about personal income and payroll taxes. He owns his own small business. He needs to form an LLC for other reasons, but thinks he might as well form the LLC off-shore to avoid any corporate taxes (several countries will do this with no taxes). All profits would be shown in the other country, and thus the LLC wound have no taxes.

Then, instead of paying himself a salary, he would borrow money from the company with a 0% interest loan. He'd never have personal income, and thus never pay taxes.

I see many likely problems with that situation, but I can't persuade him. So, can ATOT come up with a big list of reasons why that could come back and haunt him?

I'm a tax CPA with international experience. I worked in PriceWaterHouseCoopers European HQ in Paris and in the US/World HQ in NYC etc.

There is a lot of mis-information in this thread. This topic, like many in tax, in quite complicated.

The primary reason not to do this is it is prima facia criminal tax evasion. His likely sentance will be 7 - 8 years in Federal prison. These types of abusive "offshore" scemes have the IRS (and the DoJ as they prosecute, not the IRS) attention and receive top priority. They are constently looking for it.

Even if he sets up an offshore company tax will be due here for two reasons (1) he is a US citizen therefore income from any source (domestic or foreign) must be reported (that has been upheld by the Supreme Court); (2) it sounds like you are performing the work here, as such it is US source income and the tax would be due here, not in the foreign location.

There are two theories or approaches employed world-wide in taxation. One is that the income which arises from activity within a countries borders are taxable by that country. The other is that persons (e.g., companies & individuals) from that country must pay tax to their country on their world-wide income. The USA is the only country that employs both approaches (although I understand that Australia is very close).

I can tell you with a great deal of certainty his sceme will not go unnoticed for very long. There are too many banking requirements and disclosures required, particularly after 9/11.

In short, there is no legal basis for his scheme and it will be prosecuted as criminal (not civil) tax evasion. There is no statute of limitations available to him either.

LMK if you need more information,

Fern

 

[Fern]

Originally posted by: dullard


Updated to keep the thread useful:

Note: I know the IRS would frown on this......

No, it is far beyond "frowning". Offshore accounts with unreported income make the criminal tax evasion a "slam dunk". No way he could ever win. He is guarenteed to get 7 or 8 years in a Federal prison. The fines and penalties from the numerous rules he would be violating will likely consume all of his worth. He will likely exit prison bankrupt.

Fern

 

[PoloShirt]

Originally posted by: Fern
No, it is far beyond "frowning". Offshore accounts with unreported income make the criminal tax evasion a "slam dunk". No way he could ever win. He is guarenteed to get 7 or 8 years in a Federal prison. The fines and penalties from the numerous rules he would be violating will likely consume all of his worth. He will likely exit prison bankrupt.

Fern

Would he go to "white collar" prison or "hard core gangbang" prison?

 

[Fern]

Hard Core Federal prison.

 

[FoBoT]

tell him to get Oz on DVD to watch and he'll be Beecher
http://www.cantstopthebleeding.com/img/oz0322.jpg

 

[mchammer]

FPMITAP

 

[dullard]

Fern, thanks for the input. I knew it was illegal. I just needed some good arguments and good examples. You gave me a good argument. I did some searching, and here is a good example. Of course, the numbers here are all ~2000 times larger in the Walter Anderson case, but the idea is the exact same. Result: ten felony counts, pled guilty to one of them last month and the rest dropped. 10 years in jail expected.

 

[Jeff7]

Dear Greedy Assholes:
If you own your own business, you have to pay corporate taxes. It's part of the admission price to the party.


In closing, stop being greedy assholes.

Thank you.

 

[bctbct]

OP tell your boss to outsource his labor, he will probably save more anyway :laugh:

 

[Dunbar]

Your boss sounds like a real idiot.

 

[KLin]

Originally posted by: dullard

Originally posted by: krunchykrome
He'll get audited in due time and I gaurentee you that he'll shape up. I personally know someone who did something similar to this.

He has had a recent tax audits. And the IRS is giving him many thousands of dollars of fines, back taxes, and a lot of interest. This is what makes him want to do this. How is your friend doing?

I bet he's on the IRS radar right now. IF he pulls this stuff and the IRS gets a hint of it, I bet they will throw the book at him.