Taxable Talk

By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.

First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors’ trusts are another useful vehicle.

But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.

And those are the domestic trusts.

The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them.

Remember: If it sounds too good to be true it probably is.

That concludes the 2008 series of Bozo Tax Tips. Don’t be a Bozo: Use legitimate tax savings vehicles rather than Bozo methods.

The IRS loves Bozo tax celebrities. They get a chance to show you and I that Bozo celebrities must pay their taxes. And if they go to court and win, it’s guaranteed that there will be plenty of publicity. So without further ado, here’s Bozo Tax Tip #2, a repeat from last year.

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)

Here’s what I wrote back in January 2006 when Hatch was convicted:

Mr. Hatch has cemented a place in the Bozo Tax Criminals Hall of Fame (a website I’ll create one day). Let’s look at his stupid not so good actions.

1. Hatch goes to accountant #1, find out that he owes over $300,000 in taxes. He goes to accountant #2, and the tax bill is around $240,000. (At his level of income, some differences in taxes owed is normal.) He then asks accountant #2 what his return would be if he didn’t declare the $1 million in Survivor winnings. Accountant #2 makes Hatch sign a statement that he won’t file that return (it showed Hatch getting a $4300 refund). He filed that return.

5. Hatch is found guilty. Roth Tax Updates speculates that his sentence will be around 3 years in jail. Oh, he’ll also have to pay those taxes, and interest and penalties. The maximum possible sentence is 13 years in prison and a fine of $600,000.

Hatch is now serving his prison sentence of 51 months. He recently appealed his conviction, though chances of it being overturned seem slim.

2008 Update: And they were slim. Last February, Hatch’s appeal was denied. As you might expect, 300 million witnesses can’t be wrong.

Tomorrow, I’ll be posting my number one Bozo Tax Tip for 2008. I guarantee that if you follow that tip you will be certifiably Bozo.

Let’s assume you’ve procrastinated on your taxes, and you (all of a sudden) notice it’s April 15th. You’ll just call your accountant, and you’re sure he’ll drop everything for you.

No chance.

If you called me today, and I haven’t yet received your paperwork, you will be going on extension. We’ll make a quick and dirty estimate of your income, pay the appropriate amounts with your extension (and any estimated taxes for 2008), and we’ll come back to your return when we both have time.

And if you call me at 4:45pm on Tuesday, April 15th expecting me to drop everything and complete your return I might start to laugh. Indeed, I will be dropping everything at 5:00pm this Tuesday—my brother, sister-in-law, and niece are in town and we’re going to dinner.

Let’s assume your business has been successful. Very successful. What should you do with all that money, especially if you’d prefer to not send a lot of it to Uncle Sam?

Well, you can take the Bozo method of hiding it in foreign bank accounts. I’ll just transfer the funds to my account in Liechtenstein/Luxembourg/Switzerland/Cayman Islands/Isle of Man/etc. The IRS will never find me. And, voila, I have a lot less income to report.

There’s nothing illegal about having a foreign bank account. There’s a lot illegal about not reporting foreign financial accounts if you have $10,000 or more in one or more such accounts. That $10,000 figure is determined by adding the maximum balance in each account at any time during the year. If you do have foreign bank accounts you would need to report them by checking a box at the bottom of Schedule B on your tax return and by filing Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30th.

Heh, if you’re going to violate one law (tax fraud, by not reporting all your income), what’s another couple of laws? Well, foreign bank accounts come under tremendous scrutiny. Consider the recent mess in Liechtenstein. Germany is quite annoyed with the tiny principality, and many countries are now finding out about some of the individuals who have bank accounts in Liechtenstein. Or take Neteller, an Isle of Man based financial intermediary, which sent all of its records to the Department of Justice. A reasonable assumption is those records have made their way to the IRS computing center in West Virginia.

The penalties for breaking the foreign bank account reporting laws are stiff. The minimum penalty for willfully not reporting a foreign financial account is $100,000.

Instead of trying to beat the system by violating the law a much better non-Bozo strategy is to work with your tax professional to find ways of working within the law to lower your taxes. But Bozos will be Bozos….