QUESTION: i am looking into possibly setting up an offshore trust, i
am US citizen residing fulltime outside of US although my business is
located in states. I am a 1/3 partner in LLC in real estate brokerage
business. I would like to shelter taxes, and therefore at the closing,
create a offshore trust which will collect a commission on a few deals
a year, so this trust I would actually own, but of course the IRS
would not realize that. My question is does this type of trust have
to "legally" report income and pay foreign income taxes.

REPLY: As I see it, the problem is not foreign income taxes. It's U.S.
income taxes.

An offshore trust formed by a U.S. person who is a beneficiary of that
trust (or if the trust has any other U.S. beneficiaries) is called a
"grantor trust". The founder of a foreign grantor trust is subject to
U.S. tax on the income earned by the trust. If a foreign trust with a
U.S. grantor and any U.S. beneficiaries has income and that income is
not reported, then the trust grantor has engaged in tax evasion.

An intentional failure to report income to the IRS is tax evasion and
is considered to be a crime by the U.S. government. If any U.S. tax
professional were to assist someone in committing tax evasion then
both the taxpayer and the tax professional could be guilty of
conspiracy -- which is a separate crime.

As for whether taxes would be due to the country in which the trust is
located, that's unlikely if the income is derived from work performed
in the U.S. or if the trust is formed in a zero tax country.

As for being able to hide money from the IRS, you might want to review
my article on the "Secrecy Myth" which is on my web site at
http://www.offshorepress.com/secrecy-myth.htm

Vern Jacobs

P.S. I'm posting this exchange with an unnamed person because it
illustrates the sort of thinking that I encounter frequently. Most tax
professionals would be far more blunt in their response than I have
been, but those who are self-employed are subject to some seriously
harsh tax treatment by the U.S. tax law. The combination of federal
and state income taxes plus the self-employment tax can easily consume
up to 50% of the incremental income of a self-employed person.