Taxes can affect just about every area of your financial life. From your retirement savings and life insurance to the gifts you give to your family members, there are many tax liability issues that are easy to overlook. Those with significant resources can sometimes run afoul of federal tax laws without trying to do so.
Behaviors that people think are legal could actually put those individuals at risk of criminal charges if they get caught or face an audit in the future. If you have engaged in either of the two questionable financial practices below, you might be in a vulnerable position during an audit.
1) Holding money in offshore accounts does not protect you from taxation
People have long used international banking as a means of avoiding taxes on the capital taxes on their assets. However, the Internal Revenue Service (IRS) requires that those subject to federal taxation disclose not only accounts held in domestic banks but also the balances in foreign bank and investment accounts.
Some people intentionally choose to bank with countries whose strict privacy laws often mean that their banking records aren’t easily accessible to the IRS. The Cayman Islands, Switzerland and Singapore are favorite locations for such accounts. However, if the IRS does find out about the account or audits you and discovers the money trail leading to those accounts, you could face allegations of tax evasion and major financial penalties.
2) Giving people physical property doesn’t sidestep text requirements either
If you give a loved one a lot of money, eventually they will have to pay gift taxes on those resources. The bigger the amount that you give, the more likely it is that they will have to fill out paperwork at the bank before depositing the cash or the check you provide.
Giving someone valuable physical assets seems like a way to avoid paying taxes on a transfer. Handing over a $10,000 tennis bracelet to a child is an action that is hard to track. However, during an audit, such transfers could come to light. While they may not be financial gifts, valuable property transfers to your family members still require tax filings or put you and the recipient at risk of allegations of tax evasion.
Violating the law in an attempt to hide assets or transfer them without paying tax on them could be a risky decision whose consequences far outweigh the short-term benefit. Talking about your tax minimization strategy with a lawyer can help you avoid making mistakes that might violate the law and leave you vulnerable.