We’ve been in the “offshore” business long enough to have some fairly long memories.
Thirty or 40 years ago, it was cool to have an offshore bank account. At a cocktail party, someone might casually mention they had assets in Switzerland. To the “in crowd,” offshoring yourself was a mark of sophistication.
Decades later, going offshore and announcing it to friends, co-workers, or even family is very much like searing a proverbial scarlet letter into your flesh.
As with many facets of life, we can thank the media for this change of attitude. A steady stream of headlines equates anything offshore-related with tax evasion, money laundering and other criminal activities.
A few headlines you may have seen over the years prove our point:
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“Citibank Admits to Lapses in Dealings with Offshore Shell Banks” (from 2001)
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“Tax Cheats Called Out of Control” (from 2006)
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“When Governments Get Tough, Criminals Get Going Offshore” (from 2019)
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“$427 Billion Lost to Tax Havens Every Year” (from 2020)
What’s especially interesting to us is how the estimates of tax revenues lost to “offshore cheats” have zig-zagged over the years.
In 2000, Jack Blum, a lawyer and IRS consultant, estimated that offshore tax evasion cost the government $70 billion annually. But in 2002, the IRS cited a much lower figure – ranging from $20 billion to $40 billion annually.
Also in 2002, then-IRS Commissioner Charles Rossotti told The New York Times the agency had identified 82,100 taxpayers who used offshore accounts to evade taxes, with an estimated annual tax loss at $447 million. That’s a heck of a lot less than $20 billion, much less $70 billion.
Fast forward to 2007, when Reuven S. Avi-Yonah, a law professor at the University of Michigan, told Senate investigators that the United States could be losing as much as $50 billion from what he called “international tax maneuvering.” But Avi-Yonah also said the real loss could be as much as $150 billion.
Government revenues supposedly lost to offshore tax evasion ballooned to $345 billion annually, according to a 2010 analysis published in Taxes—the Tax Magazine. However, it appears the author of that article, Dean Marsan, concluded that the entire “tax gap” then asserted by the IRS – the same $345 billion – was attributable to offshore tax evasion. Indeed, that same year, the Senate Permanent Subcommittee on Investigations concluded in a report that American taxpayers with offshore investments were evading $100 billion in tax each year.
Naturally, we were interested in the origin of these wildly disparate estimates of offshore tax evasion. We decided to start at the beginning with Jack Blum, whose $70 billion estimate was used in 2000 to back an affidavit in support of an IRS summons for records from MasterCard and American Express.
Blum never explained how he arrived at this number, but thanks to the implied credibility that comes with such things, reporters started using it in their own articles. But being curious, we persisted, and in 2014, we finally got an answer. When asked about his original $70 billion estimate, Blum admitted that he hadn’t exactly applied rigorous calculations to make it. “You just have to take a guess at it,” he said.
In 2014, we made a back-of-an-envelope calculation which concluded that American offshore tax evaders would need to generate at least $380 billion in unreported annual income to ring up a $150 billion tax bill. Assuming a 4% return on investment, the pool of capital required to generate this much income comes to $9.4 trillion.
To get a sense of how large a number this is, at the end of 2013, the GDP of the United States was around $16.8 trillion. The GDP of the entire world was around $71.7 trillion. This would have meant that around 13% of global GDP consisted of money hidden away offshore from the IRS by US taxpayers alone.
And, assuming that non-US taxpayers evade tax offshore at the same rate as US taxpayers, that means about $40 trillion – nearly 56% of global GDP – was in 2014 hidden away globally in illegal “offshore tax schemes.”
Frankly, we find that number preposterous. While some people do evade taxes, to think that a full 56% of the world’s economic activity is somehow hidden away in tax havens is beyond believable.
So what’s the real number? We can’t confess to knowing, but when Congress enacted the infamous Foreign Account Tax Compliance Act in 2010, the congressional Joint Committee on Taxation estimated it would bring in a comparatively modest amount of revenue: around $750 million per year.
The point of reciting this history isn’t to condemn Dr. Marson, Mr. Blum, Dr. Avi-Yonah or the Senate Permanent Subcommittee on Investigations. It’s that you simply can’t trust reports in the mainstream press blindly reciting gigantic estimates of offshore tax evasion.
What’s more, we believe that going offshore is now more important than ever. And fortunately, there are legitimate ways to do it that won’t get you in trouble with the IRS or any other country’s tax authority.
For instance, it’s 100% legal for an American to open a non-US bank account, buy precious metals outside the United States or purchase real estate overseas. It’s also not a crime for an American to create an offshore trust or an international business.
Naturally, there are reporting obligations that accompany such investments or structures. And the penalties for failing to comply with them can be awe-inspiring. But in our view, it’s worth taking the journey offshore, so long as you do it with the aid of a trusted partner who understands the rules.
And you don’t need to look far to see why you might want to “offshore” your investments. The United States is just a single country on a global map – one that is increasingly intrusive, economically volatile and litigious.
The bottomless pit of federal debt now amounts to nearly $29 trillion, with the official unfunded federal obligations coming in at another $123 trillion. Some estimates put the real figure for unfunded obligations as high as $222 trillion. Price inflation is soaring, and the real inflation rate far exceeds what’s reported in the Consumer Price Index.
At some point – admittedly, we don’t know when – America’s trading partners will decide they no longer trust the dollar to be the world’s reserve currency. And that could lead to a big drop in the dollar’s value, which in turn might trigger Uncle Sam to impose foreign exchange controls – limits on how much money you can move outside the country without getting advance permission from Big Brother.
We’ve also documented other reasons for setting up an offshore nest-egg. They include greater investment opportunities, better asset protection opportunities, increased privacy (although not from the IRS), and investment continuity – being able to trade if domestic markets are temporarily closed.
But perhaps the best summary of the “case for offshore” comes from the late asset manager Barton Biggs. In his book Wealth, War & Wisdom, Biggs analyzed the successes and failures of wealthy families over the last century who were caught up in war and political chaos to protect their assets. His conclusion was that one simple and consistently successful strategy during both world wars and in hyperinflation was international diversification: keeping a portion of your wealth outside your country of residence.
The bottom line is that despite the anti-offshore frenzy orchestrated by the media and government, it’s perfectly legal – and highly recommended – for Americans to invest and do business internationally. Remember that the next time you see a headline equating “offshore” with tax evasion, money laundering, and other criminal activities.
