Asset Protection: Thwarting the IRS

The search for tax loopholes is almost as old as tax itself. People have tried to thwart the IRS’ collection of tax debts of all kinds every which way possible. From making fraudulent transfers to hiding money under the floorboards, Americans have tried to cheat the IRS out of its due. In the end, however, more often than not, the government gets its money.

To be sure, there are legitimate ways to minimize or at least defer your tax liability, such as setting up your business as a Partnership or a Limited Liability Company, setting up a Family Limited Partnership, investing in tax-free accounts, and establishing an A-B trust. But illegally hiding your money in an effort to defraud the IRS will likely get you into a heap of trouble.

Asset Protection planning and tax planning have a somewhat symbiotic relationship. Asset protection plans often are created to minimize tax burdens and many tax strategies are said to have asset protection as their fiscal motivation. Because the asset protection business has been entwined with the tax evasion industry, it has definitely attracted some unscrupulous planners who are perfectly willing to cheat the government.

Choosing not to report income from your assets to the IRS (including from that Swiss bank account or the one you set up in the Cayman Islands), is not a feasible option and is punishable by severe fines, and, in some cases, imprisonment. Hiding accounts from the IRS turns out to be a poor asset protection strategy. Ultimately, someone knows about the account, whether it is the offshore banker, trustee or investment advisor. That person may be required to divulge account information if the secrecy laws of the country where the account is changes, or if that country enters into a tax information-sharing treaty with the United States, such as Switzerland has. There are some countries that have no treaty with the U. S. right now, but that can change at any time. The person who divulges the information may even do so negligently or maliciously or may use the information to extort money from the depositor. The depositor is unlikely to report any embezzlement for fear of a tax fraud investigation.

If you have an offshore account and you are hiding it from the IRS, you may want to speak to a tax attorney before trouble starts brewing. The best plan, however, is to avoid this type of issue by seeing an asset protection specialist who will help you find legitimate ways to protect your money.

Case Studies: Thwarting the IRS for Asset Protection

Case Study 1: Offshore Account Troubles

John, seeking to avoid paying taxes, opens an offshore account in a tax haven country. He believes his money is safe from the IRS. However, changes in international tax information-sharing treaties and the risk of account disclosure by the offshore banker or trustee put John at significant risk. Eventually, the IRS discovers his offshore account, leading to severe penalties, fines, and potential imprisonment.

Case Study 2: Unscrupulous Asset Protection Planner

Sara consults an asset protection planner who promises to help her minimize her tax liabilities while protecting her assets. Unbeknownst to Sara, the planner engages in illegal practices and attempts to defraud the government. The scheme unravels, and Sara becomes entangled in a tax fraud investigation, facing legal consequences for the actions of the unscrupulous planner.

Case Study 3: Hiding Income, Facing Consequences

Mark decides to hide income from the IRS by not reporting it. He believes that keeping his assets secret will protect him from taxation. However, his actions constitute tax evasion, a serious offense. The IRS eventually uncovers Mark’s hidden income and initiates an investigation. Mark faces severe fines, imprisonment, and a tarnished reputation due to his misguided attempt to evade taxes.