The IRS Audit Blog

Posts Tagged ‘representation’

Offshore business as a method of tax evasion took the forefront in March this year when UBS handed over the names of 250 account holders who had withheld income information from their tax accounts. The effect has been a snowball of TIEAs, better known as Tax Information Exchange Agreements, predominantly between the classic tax havens and the larger nations who suspect tax evasion.

So how can offshore business still be useful in the face of such risks?

The important thing to note in these cases is that information was withheld by the account holders, which is automatically considered illegal. However, it is still possible to conduct offshore business in tax friendly jurisdictions, in compliance with the law. The key is to identify and choose the best jurisdiction for your business type and structure your company accordingly. This is obviously more tedious than most entrepreneurs initially imagine, and for that reason the use of consultancy firms and offshore specialists is both a logical and common practice.

Still, offshore may not be right for everybody.

Who conducts offshore business?

Offshore business is popular with the following professionals: successful, independent contractors, consultants –especially in IT and global financial services- and traders -especially global commodity traders-.

The following types of business can also make use of an offshore company: import/export companies, international trading companies, asset holding companies, property investment/intellectual property holdings.

Companies that are located in unstable jurisdictions or economies can benefit from an offshore business in a secure jurisdiction or economy. Similarly, expatriates who would like to protect their assets from home country taxes and inheritance laws can do so through offshore business.

If that is you…

What advantages does offshore business provide?

Offshore business is a way to potentially achieve the following: (i) minimize international taxation legally (e.g. Singapore has legally low tax rates), (ii) provide a reputable image for business (e.g. if the original country of business is untrustworthy or unpopular in a specific industry), (iii) protect global assets (e.g. if in original country asset protection laws are inadequate or badly implemented), (iv) facility company incorporation procedures (e.g. offshore business set up procedures are often simpler, faster and cheaper for entrepreneurs than their home jurisdiction),(v) provide confidentiality (e.g. some offshore jurisdictions do not publish shareholder/owner information to the public), (vi) fee exemption (e.g. business license fees, stamp duties and various taxes), (vii) no exchange controls (often the case in offshore jurisdictions), (viii) no accounting/audit requirements (some jurisdictions do not require financial statements or annual audits).

What are the risks to be aware of?

If you decide these advantages are relevant to you and you choose to incorporate a business offshore, be aware of the following: (i) OECD pressure on certain offshore jurisdictions – many popular jurisdiction are bigger targets of OECD pressures for TIEA (ii) certain offshore jurisdictions have a negative reputation that affects business image (iii) concealing information about offshore investments is illegal in most countries.

What exactly can an offshore business do?

Offshore businesses can do a variety of things dependent on the offshore jurisdiction it is incorporated under. A few examples to note are:

(i) Have limited liability status, thereby limiting director and shareholder liability to the amount of money invested i.e. share capitalization, and separating the company as a legal entity from its owners.

(ii) Conduct business in any country, just like a local company. Note: like a local company it is also subject to each of the rules and regulation of the jurisdiction in which business is conducted.

(iii) Buy, sell, hold securities, certificates of deposit, open savings and other bank accounts, transact in multiple currencies, stocks, bonds, mutual funds, other banking instruments, real estate and valuables.

(iv) Open a bank account in an international or local bank and borrow or lend money.

(v) Hold international meetings of directors and shareholders via telephone, fax or any other electronic or virtual means of communication.

(vi) Trade its own shares, hold treasury shares, and conduct mergers, acquisitions and/or joint ventures.

(vii) Transfer assets to a trust or foundation.

(viii) Trade licenses and royalty rights without paying taxes on royalty income.

Many businesses miss out on legally available tax efficiencies that can be achieved through incorporating an offshore business. It is important for any entrepreneur or director to properly research the practices that exist and that are legally viable, in order to conduct business in the smartest way possible. If offshore business sounds like a relevant practice for your business, consider your options and seek advice and approval from a well-informed reliable source, in order to take full advantage of what the globalized business world provides, and avoid becoming another news headline for tax evasion.

Melissa Glotzer is a Marketing Assistant at Healy Consultants. She is a graduate of the University of Manchester Business School with a BSc (Honours) in Management with Accounting and Finance.

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Question: IRS Tax audit penalty on ebay transactions.?

My husband filed tax as married jointly in 2008. I was selling things on ebay off and on, those were new game consoles. I made about $500 profit. We did not consider that that was also an income. he filed my income as ‘no income’ unknowingly. now we got a letter from irs for tax audit. they have given penalty for $4000. please advice what to do?

Answer: First off, IRS does not work that fast. Look carefully at the year in question. It is more likely to be 2007.

Next, it is also unlikely that you have received an “Invitation” to an audit, ie “come on down and prove your deductions”. More likely, you received a form CP-2000 (look at the top right corner of the form), which is a computer generated form from the Automated Under Reporter Program. It will tell you that someone (Presumably eBay) reported that you received income and that it was not reported on your tax return.

That part is probably correct. However, it is not the bottom line because you incurred expenses in creating that income. Once the correct information is in their hands, they will re-figure tax and penalties based on the $500 of profit.

Now, you can try to fix it yourself but that is what created the problem. To put this to bed with the first response and pevent a back and forth of nastygrams from IRS and replies, I cannot urge you strongly enough to spend a couple hundred bucks and engage an Enrolled Agent. Look in the yellow pages under “Tax Preparers” for people with “EA” after their name.

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