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Study: 'Round-tripping' money is used to evade taxes

It may be a common assumption that if someone is under scrutiny from the Internal Revenue Service they must be guilty of something. The reality is that most individuals are not conscious committers of tax crimes. Very often, they simply have made errors of omission in filing their returns, either because of an oversight or because they just didn't know what was required.

Ignorance of the law, however, isn't something that the courts generally accept as a defense if charges of tax evasion or fraud wind up being brought. In such circumstances, the correct route to follow is one that includes consulting with an attorney experienced in tax law.

All this is not to dismiss the fact that some individuals do intentionally pursue illegal courses of action when trying to shelter their assets. It is difficult to say how often this may happen, but the fact that the U.S. government is attempting to take action to prevent it through such measures as the Foreign Account Tax Compliance Act (FATCA) makes clear that it's something officials take seriously.

There is some new research by three business educators that concludes that the U.S. has lost perhaps as much as $27 billion in tax revenue just since 2008 as a result of what's called "round-tripping."

As described by the authors, round-tripping is a practice in which U.S. investors funnel funds into offshore accounts and then use that money to buy U.S. stocks and bonds. Normally the profits from such investments are subject to taxation. But the theory of the study is that, by round-tripping, investors pose as foreign investors and thus avoid taxes.

What the researchers did was review the flow of cash into the U.S. from offshore accounts since 1984. They then filtered that to see what happened to the flow when tax rates rose and when tax collecting efforts got more aggressive.

What they determined is that when taxes went up, the flow to the U.S. from foreign accounts rose, too. For every 1 percent rise in taxes, money from foreign accounts rose nearly 3 percent. The reverse was true in the face of IRS crackdowns like FATCA.  

So their conclusion is that round-tripping is clearly a tax evading ploy.

Source: National Public Radio, "Sending Money On An Overseas Round Trip To Avoid Taxes," Jim Zarroli, April 15, 2014

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