Are You Afraid of Being Convicted of a Tax Fraud?

Don’t take it easy. Tax fraud is a criminal offense, a felony that in most countries is punished by serious fines and imprisonment. Tax fraud is having place any time when you deliberately pay less taxes than you are subject to or wrongly claim a tax repayment by acting dishonestly.

General tax fraud means the taxpayers intentionally violate their legal duty of filing income tax returns and/or paying the correct amount of due taxes. This may take a form of underreporting or omitting income, claiming false or inflated or unallowable deductions or credits, keeping two sets of books, claiming personal expenses as business ones, hiding or transferring assets or income, making false entries in records, conducting business without registration and reporting.

Besides general tax fraud there are also Abusive tax schemes. The latter is a more sophisticated concept generally treated as form over substance. It can be described as a violation of law involving flow-through entities as parts of the scheme to evade taxes. It includes using of limited liability companies (LLC), limited liability partnerships (LLP), international business companies (IBC), foreign accounts, offshore debit/credit cards and other instruments from foreign jurisdictions.

Below are the quotes from the IRS publications giving examples of known abusive tax schemes. Many countries are following the U.S. in these matters.

Abusive Foreign Trust Schemes: The foreign trust schemes usually start off as a series of domestic trusts layered upon one another. This set up is used to give the appearance that the taxpayer has turned his/her business and assets over to a trust and is no longer in control of the business or its assets. Once transferred to the domestic trust, the income and expenses are passed to one or more foreign trusts, typically in tax haven countries.”

International Business Corporations (IBC): The taxpayer establishes an IBC with the exact name as that of his/her business. The IBC also has a bank account in the foreign country. As the taxpayer receives checks from customers, he sends them to the bank in the foreign country …Here the taxpayer has, again, transferred the unreported income offshore to a tax haven jurisdiction.”

False Billing Schemes: A taxpayer sets up an International Business Corporation (IBC) in a tax haven country with a nominee as the owner (usually the promoter) …The promoter then issues invoices to the taxpayer’s business for goods allegedly purchased by the taxpayer. The taxpayer then sends payment to the IBC that gets deposited into the joint account held by the IBC and taxpayer. The taxpayer takes a business deduction for the payment to the IBC thereby reducing his/her taxable income and has safely placed the unreported income into the foreign bank account.”

Fraudulent Loans: The taxpayer’s International Business Corporation (IBC) will make a loan to the taxpayer. The funds are wire transferred back to the taxpayer’s U.S. bank account. Since these wired funds are allegedly loans they are not taxable”.

It is legal to involve limited liability companies, limited liability partnerships, domestic and foreign trusts, international business companies and offshore bank accounts in your business. It is illegal to use them for the purpose of concealing the true nature and ownership of the taxable income or assets and tax evasion.

Any hidden income and gains including hidden foreign accounts can be classified as a tax fraud same as falsification of corporate and/or individual tax returns.

Despite of the statistical likelihood of your being prosecuted for tax fraud close to zero, it does happen to some people. When planning your offshore business be careful to differentiate between a legal lower tax scheme and a tax fraud. Always consult with a reputable international tax advisor before buying in a scheme.