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Can an Online Business Lead to Offshore Tax Evasion Concerns?

Many people view an online business as an easy way to supplement income and provide for their family. In many cases, the additional income provided by an Internet company can indeed make a real, positive difference. However, in some cases, a business dealing predominately in cash, an e-business engaged in cross-border deals, or other online activity can trigger suspicions of offshore tax fraud.

It is important to note that since the Great Recession Congress and the IRS have focused on offshore tax fraud as a main cause of the “tax gap.” The tax gap is the difference between expected tax revenues and actual tax revenues. Thus, the IRS has launched an array of offshore enforcement programs including the Offshore Credit Card Program, the Swiss Bank Program, FATCA, and an array of international governmental agreements allowing for the automatic, reciprocal sharing of tax and financial data.

IRS Views Online Businesses as Presenting a Greater Risk for Tax Fraud

The IRS views online businesses as inherently riskier and seems to believe that entities of this type are more likely to engage in tax fraud. This risk is summed up in the IRS examination manual as:

The potential for omitted income is greater in E-Business, due to the borderless and paperless feature of the organization. Another large segment of E-business transactions is internet bartering.

Thus the first risk is that online businesses can operate in any nation where there is an Internet connection. Thus, online businesses can reach across borders without many of the physical signs f presence associated with a brick and mortar operation. Second, the paperless nature of many businesses means that it is trivial for owners or bookkeepers to alter or falsify records. Third, the IRS seems to believe that a large number of Internet sales are carried out through trades. In this respect, the IRS is likely concerned that parties will fail to report income and capital gains and pay taxes after exchanging property.

Thus, due to the IRS’s hyper-focus on offshore tax fraud and the nature of an online business, it is well within the realm of possibility to face offshore tax allegations due to online business activities.