THE FOLLOWING IS AN EXCERPT FROM AN ARTICLE BY BRIGID McMENAMIN WHICH APPEARED IN THE JUNE 15, 1998 ISSUE OF FORBES MAGAZINE (SEE ALSO: U.S. TAX LAWS AFFECTING OFFSHORE PLANNING, AND IRS CRIMINAL DIVISION INFO):

Have you heard that you can cut your tax bill with an offshore trust? You can -- if you don't mind the prospect of a jail sentence.

Check out Schedule B of the tax return you sent in a few months ago. It asks whether you have a foreign bank account, securities account or trust. Lie and you are guilty of filing a false tax return (maximum penalty: a $250,000 dollar fine and up to three years in jail).

Assuming you tell the truth, you must also file IRS Form 3520, naming the trustee and beneficiaries, in the year you set up the trust and in every year in which you make a transfer to, or receive a distribution from, the trust. If the beneficiaries are Americans -- say, you and your family -- you also have to file Form 3520-A, giving Social Security numbers, rights to income, an income statement and balance sheet. If your accounts top $10,000, you also have to file with the Treasury Department a Form TD F 90-22.1 showing account numbers and balances.

For U.S. citizens, earnings on these foreign accounts are just as taxable as earnings on U.S. bank and brokerage accounts. Apart from the threat of criminal prosecution for egregious violators of the reporting rules, the IRS can levy a penalty of 35% of the value of the property transferred on people who open foreign accounts and fail to send in the right forms.

How could the feds ever know about a trust if you keep mum? Easy, if you tap a U.S. account to fund it. Federal law requires U.S. institutions to file a Form 4789 with the IRS on every cash transfer of $10,000 or more. Even if you don't report it, a miffed spouse or employee might.

Last year the IRS announced a crackdown on folks who use trusts -- domestic or foreign -- to evade taxes (CLICK FOR ARTICLE). The agency has trained some 1,000 employees to audit trusts. In 1997 the flagged 10,000 dubious trust returns, and of these, 500 are being considered for criminal prosecution. This year they're doing twice that according to IRS trust cop Thomas Wilson.

In the past 18 months the IRS has referred to the Department of Justice 47 trusts (domestic and foreign) for criminal prosecution. Wilson's staff is compiling a database of the dozens of snake oil salesmen who sell trusts as a ploy to avoid taxes. The Internet helps. "We shop the Internet the same way other folks do".