Wealthy Americans are running out of ways to hide their money. The IRS has been relentless in prying open the secret Swiss bank account — dozens of Swiss banks are cooperating with the agency. Just last month, a settlement with the private bank BSI revealed bankers used coded language and nameless credit cards to help Americans avoid taxes. Credit Suisse and UBS, Switzerland’s largest banks, have already paid fines for similar shenanigans.
The rest of the world is also getting less hospitable to American tax dodgers. A 2010 federal law, the Foreign Account Tax Compliance Act, requires all foreign banks report to the IRS on their American customers. It’s working so well that Americans abroad say they’re having trouble opening bank accounts even for legitimate purposes. Banks don’t want the regulatory and paperwork hassle.
So, what’s left for the secretive and tax-averse American? Not much, accountants and attorneys say. Here are four ways the wealthy can still get secrecy, or lower taxes — though rarely both at the same time.
There are legitimate reasons to have an overseas bank account. Americans who live overseas might want ready access to their money. An offshore trust may offer more protection from creditors or lawsuits than one set up in the U.S. An overseas limited liability company, or LLC, might let you hide aspects of your business from competitors. That’s “totally legal,” says Martin Press of the Gunster Law Firm. “You can have money anywhere in the world.”
It’s not the tax dodge it used to be. Traditionally, banks in tax havens like Switzerland haven’t reported those accounts to the IRS, making it possible to hide not just what’s in the account but its entire existence. The Foreign Account Tax Compliance Act is putting an end to that, though.
Hide inside a shell
The rich often use shell companies, like LLCs, to buy property or investments, so that the company name shows up on public documents, not the individual. Another reason these structures are used to buy into hedge funds, private equity and venture capital funds: Rich investors mostly want to avoid endless solicitations for other investments. “Once you get on somebody’s list, you get hit with every proposal,” says Domingo Such, a partner at the law firm Perkins Coie. While other investors won’t know your business, the IRS still will because LLCs are required to file tax returns every year. Use a trust
Trusts can be used to keep assets hidden from nosy neighbors and to keep tax bills down, within reason. Income from property or investments held in the trust goes to the beneficiaries free of estate or gift taxes. Beneficiaries also can avoid regular income taxes — if the trust pays the taxes rather than the individual. Another advantage of trusts is the way they pass automatically to heirs after your death. Otherwise, your possessions and the details of your estate can get caught in the probate system, which is often quite public.
Hire an expert
The wealthy can still afford to hire sophisticated accountants, who spend years searching for legal ways to lower tax bills. A recent U.S. Senate report identified a few esoteric strategies that rely on derivatives or deferred compensation to lower tax bills. Most of the time, the goal isn’t to hide money but to control the timing of income and what form it arrives in. For example, taxpayers can pay lower rates if income is in the form of long-term capital gains, rather than ordinary income.
Still, clients are getting cautious about aggressive tax planning, especially if it involves any overseas transactions, says David Gannaway, a former IRS agent and now an accountant at O’Connor Davies in New York. Taxpayers now know the IRS is watching what happens overseas, and the effect is similar to when drivers know police are out looking for speeders. “They’re not driving 95 down the Interstate,” Gannaway says. “They’re driving 75 with their foot close to the brake.”
— Check out 3 IRA Distribution Mistakes to Avoid on ThinkAdvisor.