Too Good to Be True – Beware of online tax advice

Since the genesis of social media and other online platforms that give essentially anyone a space to voice their thoughts and opinions, there have been “experts” and “gurus” that offer their unsolicited advice on a variety of legal topics. The problem with this advice is that these experts and gurus have neither the professional qualifications nor the experience to give sound advice to anyone on the topics that they claim to know so well.

While I can go on a full tirade about the many topics that are affected by this inevitable trend, I feel that I have an obligation as a Tax professional to warn you about the “experts” and “gurus” that spread half-baked information about the area of law that I and many others live and breathe daily.

For starters, if you see something on the internet that claims to be a demystifying “tax loophole” that makes you think, “Wow, I can’t believe it! I should do that too!”, chances are that this magical tax scheme is a fallacy. Before we dive into the essence of the scenario, I would like to point out that there are legally sound ways to minimize and, in some cases, eliminate your US tax burden. Reach out to your neighborhood friendly tax attorney to discuss these options. If you’re in my neighborhood, I’d be happy to discuss.

OK, now that we have that out of the way let me provide you with some context. I have seen posts telling US citizens that one way to work around US taxation is to set up a company (LLC, Corporation, etc.) in the Bahamas and have all your income flow to the Bahamian company. The scheme claims that you can write-off expenses, send income offshore, and essentially avoid “losing all of your money” to US taxes. Let’s be clear, this is not tax efficiency, this is the dreaded “E-word”, Evasion. In the real world, this “clever scheme” could have serious consequences. Now, how silly would you feel if you were to be in legal trouble from following advice of a random online “expert”? I don’t want that for you.

So, let’s talk about some basic tax principles that you should keep in mind when you see someone promoting a “too good to be true” tax plan. First, US citizens are taxed on their worldwide income. While there isn’t one code section that explicitly states this, the fundamental truth of worldwide taxation is the result of several key tax sections working together. I’ll spare you the small details, but the cornerstone of US taxation is section 61 of the Internal Revenue Code that defines gross income. Section 61 provides that “gross income” means all income from whatever source derived. This means that your income for tax purposes includes all income no matter how it was achieved. Yes, that even includes illegally gotten income but that’s another conversation for another venue. Now with that in mind, the US Tax Code contains several international code sections that expand the income of US Citizens to include foreign source income. These rules are pertinent as they determine whether a particular item of a US Citizen’s income are U.S. sourced or Foreign Sourced. These are mainly important for tracking foreign tax credits and withholding but nonetheless bolster the universal rule of worldwide taxation. However, the more important set of rules that pull foreign sourced income into the US Tax base are the “anti-deferral” rules surrounding Controlled Foreign Corporations (CFCs), Passive Foreign Investment Companies (PFIC), and Foreign Grantor Trusts. Let’s start with a general overview of the CFC rules. Found in sections 951 – 965 of the Code, these rules cover what we call in the tax world, “Subpart F” income and the infamous GILTI (now, NCTI) rules. To fall into the matrix of these rules, the Code essentially provides that a corporation is a CFC if more than 50% of the vote or value of the Corporation are owned by U.S. shareholders. If your foreign corporation falls under this classification, it must include its pro rata share of the company’s Subpart F income into its gross income for the year. Then comes the “good” news – it’s taxed at the U.S. corporate tax rate (21%) rather than the potentially lower tax rate of the jurisdiction that it was formed in. So as the umpire says in baseball – strike 1.

Next let’s briefly discuss the PFIC rules. In simple terms, A PFIC is a foreign corporation that earns at least 75% of its income from passive sources (like interest, dividends, rents, or royalties), or at least 50% of its assets produce passive income. While that may sound harmless—many investors assume “passive” just means safer—the U.S. tax system treats PFICs with extreme caution. Without these rules, taxpayers could park money in offshore funds or holding companies, allow earnings to compound tax-free, and avoid U.S. tax indefinitely.

The result is a set of rules that are not only punitive but also incredibly complex. If you hold stock in a PFIC, you could be subject to what’s known as the “excess distribution regime.” In practice, this means that any gain or certain distributions from the PFIC can be allocated back across all the years you’ve owned the stock, taxed at the highest marginal rates for each of those years, and then penalized with an interest charge. Truthfully, it’s not a situation you want to be in. The IRS designed these rules to sting, and they do. Strike 2.

Finally, let’s touch on foreign trusts. U.S. citizens who set up or benefit from foreign grantor trusts can find themselves entangled in reporting obligations and income inclusions that they never anticipated. The IRS requires detailed disclosures, and failing to file them can result in penalties that make the actual tax owed look like chump change. This is another area where self-styled “gurus” may claim you can shield assets offshore. The truth is that you could be signing up for years of compliance headaches and a ton of penalties that make you question your life choices. Strike 3.

Now I would be remiss if I didn’t briefly mention two other crucial aspects of tax law that you should be aware of when navigating the wide world of tax. The first is the long-standing principle known as the assignment of income doctrine. There is caselaw that is nearly a century old stating that you can’t just assign or redirect income that you earned to another person or entity and expect the IRS to ignore it. The income sticks with the person who actually performed the services or controls the asset. So, funneling your income to a Bahamian corporation doesn’t make those fees Bahamian. It just makes you a U.S. taxpayer with a reporting problem and a pending letter from the IRS in your mailbox. The next is the most infamous catch-all that the IRS has recently begun to lean on more and more as even the best planners look for ways to optimize tax outcomes – the economic substance doctrine. Codified under section 7701(o), this doctrine essentially says that if a transaction doesn’t have a real business purpose or economic reality beyond saving taxes, the IRS can disregard it entirely. That means the clever offshore LLC or shell corporation can be pierced once the IRS shines a light on it.

So where does that leave us? The bottom line is that the U.S. has constructed an intricate web of international tax rules to prevent exactly the kinds of schemes that online “experts” like to promote. The legitimate, legal, and powerful ways to reduce your tax burden like require professional guidance. They don’t come in the form of a flashy TikTok or a two-minute YouTube video. Don’t risk your financial future on internet myths. If you’re serious about tax planning, talk to someone who lives and breathes this stuff every day. At Razaa Law Firm, we help individuals, families, and businesses navigate complex tax rules and design strategies that actually work. Let’s build you a tax plan that’s sustainable, effective, and fully compliant with the law. Reach out to me directly at www.RazaaTaxLaw.com to schedule a consultation. Peace of mind is worth far more than a supposed “loophole.”