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Pay back taxes or hide money?

quagmirebetty

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Apr 10, 2020
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Hi everyone, I've been lurking for awhile but this is my first post here. I'm not seeking tax advice, per se, just some helpful thoughts from the smarter, more experienced minds on this forum on what one might do in this position. Thanks in advance!

In short, I've been a perpetual traveler for almost around 7 years and during that time, I built and monetized several websites. For the first couple of years, my earnings weren't much so I didn't worry about tax implications or anything. I figured since I was traveling and not building roots anywhere and mostly just living off my income, I was fine.

Fast forward a couple years and my earnings have gone up, far exceeding my living expenses. As a result, I'm now sitting on more than $300K of savings. This would be a happy "problem" except a couple months ago, I had dinner with a family friend who is a CPA in the country of my citizenship (not US/EU) and she informed me that it's not possible to be a tax resident nowhere and in my situation, although I haven't stayed in my country of citizenship for more than a few months every year, I'd be considered a tax resident here.

Since then, I've spoken to 3 tax consultants/tax attorneys in my home country. Two tax attorneys advised me that yes, I'd probably be liable to pay taxes here but that coming clean could open a can of worms and ultimately may be more trouble than its worth since 1. None of my income and clients are from my home country 2. I have been using a bank account that I made back in the day when I was a resident elsewhere to receive all payments (none of it has been remitted back to my home country) and 3. The tax authorities here have no real way of finding out about the income I make from my websites.

One tax consultant/CPA - not attorney - advised me to pay back taxes but recommended that I tell her how much taxes I'm comfortable with paying and she would "play with the numbers." I did some quick calculations based on this recommendation and if I reported all my earnings over the past couple years, I'd be liable for around $95,000 in back taxes not including late penalties and interest accrued on back taxes. Plus, her advice that I can report just some of my earnings seems dubious since if I were to be audited (she says given my income level, the chances of being audited are less than 5%), they could ask to see my bank account, etc, and I could end up paying the full tax burden and more. It seems like a risky bet.

The other two tax attorneys advised me to ignore what's happened in the past and just report taxes going forward. I've recently been in the process of FINALLY incorporating a company and I plan to do just that.

I just don't know what to do RIGHT NOW. Especially since 1. I need to get my money out of the bank account it's currently in since the bank has recently informed me that since I'm no longer a resident in that country, I'd have to close my account and 2. I would really like to invest in stocks and ETFs but now I'm worried about transferring money to brokerage accounts and triggering CRS/AEOI, leading to my home country investigating me for tax evasion.

So, what should I do? Pay a huge chunk of my savings in self-declared back taxes or is there a smart way to "hide" the funds and invest it?

TLDR: I have a little lumpsum of savings that I haven't paid taxes on, am now scared to invest or do anything with it. Deliberating whether to pay a lot of back taxes on it or hide it.
 
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If you're not in a hurry and if your situation permits, consider taking up residence in a jurisdiction with a favourable tax regime. Live there for at least a year or two, or as long as your attorney/CPA advisers recommend for this to work. Work with a local tax adviser in this jurisdiction to structure your wealth so that you can receive it to yourself with as low a tax burden as possible. But make sure everything is documented and follows a clear paper-trail.

However, this wouldn't change the fact that you may have been tax resident when you originally earned the funds. It would just give you a simple answer and proof to show where your funds are coming from, and it would likely hold unless you are subjected to an excruciating audit. – Explore (with a qualified adviser) if/how you can potentially use a double taxation treaty between your home jurisdiction and wherever you temporarily call home.
 
I think what sol suggested is correct, the first step would be to get residency in a place where there is a favorable tax regime and you can "clean" the money by paying taxes on them and then you could go back to your home country.
One more thing to note is that, from what I've heard and my experience, normally tax authorities need some kind of trigger to start investigating you. One trigger could be that you return to your home country form a country which is considered a tax haven from a residential perspective, so for example if you return to Italy from being resident in the Caribbean, it's possible that the Italian tax authority might want a word with you, especially if you were declaring 200k € a year before leaving the country. Another trigger could be if you go home and buy a house, the tax authority will want to know where the money comes from. But if you never had any income in your home country, and you don't do anything flashy when you come back, it's really difficult to draw attention from tax authorities ( of course opening a bank account and putting in 300k is suspect :D )
You could also invest those 300k into creating a new company, maybe there are places where you can go, invest 300k in a newly formed company, without too much hassle, but I'm not an expert on that
 
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Two tax attorneys advised me that yes, I'd probably be liable to pay taxes here but that coming clean could open a can of worms and ultimately may be more trouble than its worth since

Yes, that is exactly what will happen in that case, an "opened can of worms". If noone cared about you, then you probably are under the radar and tax office probably cares about other things, maybe about coronavirus right now...

I'd avoid doing what the 3rd person advice you - don't fake or adjust your accounting.
The two options are obvious - 1) declare+pay or 2) do nothing.

Option #1 is bad because it can open the can of worms (penalties, interest, possible investigation and criminal case) but it can also be good if your country uses the concept of effective remorse
Option #2 is bad because as Martin mentioned you may not be able to sleep at night but it is also quite good if in your case the money doesn't involve your home country very much (no local bank accounts, no local companies, no VAT, no local invoices).

So probably the advice you got from the 2 accountants is pretty good, nothing is perfect but you got yourself in that situation and they are advising you pretty well imho.
 
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