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Thinking of placing money offshore to reduce your tax liability? Think carefully. Not only is it a misconception that Americans can avoid taxes by placing money offshore but also certain offshore stock accounts can have dire consequences for the unwary investor.

"Offshore accounts are taxable for U.S. citizens. Period," says asset protection specialist Robert Lambert, president of Asset Protection Corporation. "U.S. citizens are taxed on worldwide income.

That means if even your offshore trust or international business company is domiciled in a tax haven, it is still subject to U.S. tax laws.

Offshore tax havens such as the Bahamas, Belize and the Cayman Islands have gained legendary status as places for wealthy individuals from CEOs to drug barons to shield their money from U.S. tax laws. The countries' banks are eager to attract new funds, offering maximum privacy in return.

However, the reality of tax havens may not live up to the legend.

"The myth of the tax break is perpetuated by the companies that are offshore and by unscrupulous promoters here," says Jay Adkisson, a U.S. attorney and editor of a web site on offshore planning.

The U.S. government doesn't restrict moving money offshore, but it does want to know how much money is moved and when (to keep track of money laundering) and it wants to know that it is receiving the appropriate taxes on any dividends, interests, or gains made on moneys invested offshore, says Adkisson. "In other words, the U.S. generally doesn't care if you move assets offshore -- so long as you comply with all reporting and tax requirements."

But understanding U.S. tax law as it relates to foreign accounts and transactions is just the beginning. Investors also need to know how an offshore trust or corporation operates, how these entities must be reported to the IRS, and how they are taxed.

If that weren't concern enough, experts warn the lack of regulation in the offshore industry makes it fertile ground for fraud. Rogue companies, many of whom advertise on the internet, are eager to swindle careless investors striving for tax haven nirvana. Ever hear of the Dominion of Melchizedek? It earned the dubious distinction as the first nation in cyberspace. And it sells bogus bank licenses.

Nonetheless, offshore accounts make sense for several reasons, including confidentiality from claimants, ex-spouses and other parties and for asset protection, where money in a properly structured account is protected from future claims.

"The reasons for moving assets offshore range from the mystique of being offshore to legitimate concerns for asset protection and preserving wealth for heirs," says Adkisson.