I joined a history/anthropology/archeological course that took me to Nassau and San Salvador, Bahamas for three weeks in December. "Oh, what a horrible fate," you might exclaim, but it wasn't my choice. Frankly, I would go to Siberia in December if I could learn what I learned in the Bahamas about post-Revolutionary War history. I also learned a lot about the current Bahamian economy during this trip. The fuels that prime this Commonwealth's economic engine are tourism, rum, and offshore banking.

While I avoided tourist traps as much as possible and partook of Bahamian rum when I could, offshore banking was a mystery to me. When I returned to the states, I began to investigate possibilities for overseas investment opportunities. I discovered that Americans might enjoy a tourist lifestyle, and they might discover that Bahamian rum is better than Jamaican rum, but U.S. citizens would fare better if they understood the complications inherent in offshore investment plans, even if they're offered by a friendly country located just miles from Florida. Why? Because the IRS says so.

The IRS became curious about offshore banking and investments at least a decade or more before my trip. When they discovered that these plans were sucking money out of government coffers, they began to crack down and create committees to find new ways to squeeze the vise further. This IRS interest in offshore investments became more diligent during an era when Americans became flush from stock market successes and looked for ways to avoid paying taxes on their profits. Currently, many investors seek offshore investments to offset a falling dollar and low returns on investments, specifically in foreign CDs.

While overseas investments and IRS crack-downs both seem reasonable to some and idiotic to others, there's another side to this coin. As more and more Americans began to "expatriate" their money, more and more scam artists emerged to steal the incoming funds. So, while the IRS flushes out tax haven proponents, they feel they're also protecting us from overseas theft. Even in the Bahamas, where the natives seem friendly, a close inspection of lifestyles reveals a wide discrepancy between the "haves" and "have-nots." This social and economic disparity might spell a ripe atmosphere for investment scams, but maybe not?

As serious taxpayers and curious investment seekers, how do we know when overseas investments are for real or frauds? This is where the IRS shines with their Tax Fraud Alerts and Abusive Offshore Tax Avoidance Schemes. Discover how the IRS wants to partner with taxpaying offshore investors to discover scams, and learn how to avoid abusive tax preparers all in one sitting. You may discover, as I did, that the IRS views many expatriates as people who leave the country in order to avoid paying taxes. This is an interesting point-of-view. Alternately, we can learn that the only legitimate overseas investments, in the eyes of the IRS, are foreign corporations, partnerships, and trusts. If you read closely, you'll see that none of these legitimate reasons for overseas investments would involve anyone who works at the local hamburger joint.

I'm not undermining the IRS for what they feel is the correct way to reduce tax abuse, especially in overseas banking or investment schemes. I'm not singling out the Bahamas as a high-risk overseas investment arena, either, because every country outside U.S. borders contains investment risks. Heck, we have huge investment risks right here within our borders. When we buy foreign stocks, we're investing in offshore companies. Alternately, many U.S. companies are based offshore. What I want to emphasize is this: No matter how much money we make, and no matter where or how we make it, the IRS demands that we report all worldwide income. Otherwise, we're breaking the law, and the IRS will punish us. Read the IRS FY2004 Money Laundering Tax Fraud Alert for some dramatic feedback on how the IRS treats tax abusers, and you'll see what I mean.

While you and I may not fit these criminal profiles, we need to understand how to avoid tax abuse and scams. Here are a few solutions:

1. Above all else, file a tax return and report all worldwide income.
   
   
2. File by April 15th, or file a deferment. Either way, the IRS wants to hear from you by mid-April.
   
   
3. If you keep two sets of books, be sure they look the same.
   
   
4. Investigate every investment opportunity offered to you by searching through the IRS or other watch-dog sites. Or, just drop the name of the company in a search engine, and look for the "news" section. You might discover either some nasty or pleasant surprises.
   
   
5. If you find that you're overwhelmed and can't pay your taxes, call the IRS and talk with them. Do not avoid them.
   
   
6. If you find that your refund is large enough to think about offshore investments, read #1 again.

If you file your own taxes, you might be interested in the TurboTax Free File Program. This company is working in alliance with the government to help increase electronic returns this year. However, if you have complicated deductions, it might be best to find a tax preparer. Once again, the IRS will walk you through this process in the links I provided above.

Oliver Wendell Holmes once said that, "Taxes are what we pay for a civilized society." New England colonists once defined civilization by the number of cows they owned, too. But, no matter how angry, upset, or tired we become about paying our taxes, we must do it to avoid contact with three hots and a cot at a prison somewhere. I think that's what Holmes meant?

Until Next Week,
Linda Goin