The hazards of hiding money overseas

A few things have changed since then, and with those changes should come some lessons:

• A country that provides secrecy now may not in the future. Many former tax havens, including the Cayman Islands and Bermuda, have capitulated in recent years to pressure from the United States and the European Union and now share information with tax authorities. The United States and the E.U. aren't looking just for tax evaders. They are also after drug dealers, money launderers and terrorists who have exploited bank secrecy laws to their advantage. The former tax havens decided protecting such scumbags wasn't worth incurring the wrath of powerful nations.

• Once a tax dodge becomes popular knowledge, the IRS will find a way to crack it. The IRS subpoenaed millions of transaction records from major credit card companies to find U.S. citizens who were using plastic to tap offshore bank accounts where they had hidden money. Hundreds of audits ensued.

• Don't expect much loyalty from a company that's helping you break the law. The IRS gets client lists from investment banks, law firms, accountants and promoters who have sold various tax shelter schemes, both domestic and foreign.

• Be careful whose advice you take. Some high-profile promoters of offshore trusts are in hot water with the government. Terry Neal, author of "The Offshore Advantage," was indicted on tax fraud charges in April 2003 and pleaded guilty to charges a year later. Earlier, promoter Jerome Schneider, who advertised widely in in-flight magazines, was indicted on charges of mail fraud, wire fraud and conspiracy to defraud the IRS. He, too, pled guilty and served a short jail term.

There are still several countries, including Panama and Belize, with bank secrecy laws that could help you hide assets from the U.S. government. There are also plenty of promoters who are sure that, this time, they've found a foolproof way to baffle the IRS. But don't expect to be able to check them out at your local Better Business Bureau or to cry foul to the authorities if things go wrong.

Just leave

You do have another option if you really don't want to pay U.S. taxes: Move abroad, take your money with you, and renounce your citizenship.

That's what some wealthy folks, including investment manager Mark Mobius, have done. They're no longer subject to U.S. taxes on most of their riches, although they are still subject to U.S. taxes on income that's generated in the United States. Along with their citizenship, they give up the right to travel freely to the States or to expect help from U.S. embassies or the U.S. military if things go wrong in their adoptive countries. The decision is irrevocable, which is why it's such a serious step.

You'll also need to come up with a reason why you moved that doesn't have to do with the IRS. If the government determines your primary reason for moving was to avoid taxes, it can tax you for up to 10 years after the move.

But if you really don't think your U.S. citizenship has value worth paying for, then get rid of the darn thing, and don't let the door hit you on the way out.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Jan. 15, 2009

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