Why It Matters
People sometimes use tax havens to hide income-generating investments. The idea is that because the tax haven does not report the customer's income to the IRS, the customer can avoid paying taxes on that income.
It is important to note that the idea of a tax haven -- low taxes and high privacy -- is not illegal. What is illegal, however, is failing to report income from accounts in foreign countries if the taxpayer's taxing authority requires the taxpayer to do so.
It is also important to note that one does not have to move money offshore in order to find a tax haven. Technically, a tax haven is any investment that shelters income from taxes. Thus, an IRA or 401(k) can be considered a tax haven in this sense because the investor is not taxed on the money going into (or sometimes coming out of) the account.
Source: Investing Answers
