Our economic and social world is full of systems which balance themselves either naturally or with a little help. As interest rates go down, the housing market tends to up. When bond prices rise, stock prices usually fall. For every plus, there seems to be a minus.

It was recently reported that there is a plus side as well as a minus side to certain tax havens, and what is and is not allowed by the Internal Revenue Service in terms of income. It seems that the upside to a tax haven could be a decrease in income tax liability but the downside may be a significant amount of paperwork. In other words, you can set up an offshore company, but be prepared to spend time with forms, filings and other paperwork.

Reliable sources advise against creating offshore companies as tax havens. Should a person determine that the creation of an offshore company as a way of sheltering assets is desirable, here are the drawbacks:

  • The IRS must be notified, even if the company earns no money.
  • Learning the legal ropes (at least two days) and filing out the initial forms (at least one day) are time consuming.
  • Be prepared to spend about two weeks per year completing the annual paperwork.

Imagine that a tax haven has been successfully created. Does this mean income is sheltered? Actually, it is not sheltered. The IRS requires that any income earned from an offshore entity needs to be reported. The downside of not reporting it is that when caught, the taxpayer could be subjected to penalties and interest in addition to the tax liability.

Whenever making a tax planning decision, it is a wise idea to consult with a legal tax professional. Mistakes can be costly.

Source: MPR, “The Downside Of Tax Havens? Paperwork,” Chana Joffe-Walt, Sept. 21, 2012