Chile
Christian Reeves

Chile: An Entrepreneur’s Paradise

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Chile is now one of the best countries in South and Central America for tech startups.  As you will see in this article, it is blowing past my Panama… at least in attracting tech start-ups.

Termed “The Chilecon Valley,” Santiago, Chile has become the entrepreneurial hub of Latin America by focusing on talent… and backing up its policies with cash.  As a result of these government programs, it’s attracting many tech professionals from the U.S. and elsewhere.

In tech, the world’s most valuable resource is talent.  Chile doesn’t have the talent, but they’ve found a way to import it.  While the U.S. turns away many of the best and brightest by denying them residency and visas, Chile is welcoming them with open arms.  Tech geniuses come to Stanford, Harvard and MIT, only to find that the U.S. won’t allow them to stay when their schooling is over.  Chile is cashing in on our loss by giving out residency permits to anyone who will add to the country’s emerging tech industry… and then giving out grants to get these businesses up and running.

Want to move your startup to Chile?  Talk to Start-Up Chile first.  They offer a government sponsored program that may award a grant of $40,000… and all the visas you need… if you come to their fine country.  As your business becomes more mature, they have additional government funded seed capital programs and investment rounds.  For those moving on to the big leagues, Chile has convinced many of the best venture capital firms to visit Chile to hear pitches from these businesses.

This program, which began in 2012, has funded over 1,000 companies and entrepreneurs from 37 countries.  Of these, around 1/5th are local businesses and about 1/4th are American.  The rest are from anywhere and everywhere on the globe.  This has created a very “Californian” vibe along the Pacific coast of South America and a vibrant expat entrepreneurial community.  Like Paris in the 1920s and 1030s was the home of a great expat writing revolution, led by the likes of F. Scott Fitzgerald and Earnest Hemingway, Chile is leading the way for the best and brightest in tech that don’t feel welcome in Silicon Valley.

The differences between Chile and Panama are:  1) Chile is focused on tech start-ups while Panama has targeted call centers;  2)  Panama wants you to hire local, where Chile will allow you to bring in as many of your own people as you like… from your home country or elsewhere (i.e., India).

  • Panama’s visa programs are for executives, while Chile’s are for anyone.

What does Chile get out of the program?  Other than the obvious short term financial benefits of bringing in successful people, they require recipients of the grants to coach local businesses.  They expect you to give back some of your time.  Since 2012, Start-Up Chile has held 500 meetings and 1,200 workshops and conferences focused on improving local talent.

Also, these programs have led to a number of joint ventures between Chilean and international businesses that would’ve been unattainable just a few years ago.  This, and the influx of international talent which is often hired by Chilean companies, has had a positive and lasting impact on local businesses.

But Chile has some tough competition coming on.  Brazil has been working towards becoming a tech mecca for the last few years, and, now that the World cup with its billions in investment is completed, this nation is pushing hard.  With aspirations of being the China of Latin America, Brazil offers better infrastructure and local resources, and an economy 10 times larger than Chile’s, but also a much more dense bureaucracy… one that can be impenetrable for foreign investors.

Whether or not Brazil is successful in its efforts, I suggest that Chile will remain a strong option for tech start-ups.  For me, the focused community and a government that looks to make my life easier, rather than one that’s constantly looking over my shoulder (Uncle Sam), is all I need to know to say that Chile is a great place to set up an offshore tech business.

Brazil might become the China of Latin America, but Chile will be the Singapore… which is where I would rather be.  Brazil has the local market base, but Chile has the privacy and community I want, plus a more educated workforce.

As the U.S. pushes out foreign-born talent, some might say in favor of the huddled masses coming through the Mexican border, you can expect the likes of Chile and Brazil to become even more important players on the world tech stage.

In fact, the U.S. has cut its skilled worker visas to 65,000 per year, down from 100,000 in 1999, and made the process nearly impossible to navigate.  Back in the days of Reagan (the good ole days to some), these visas took 18 months to procure.  Now, one can wait as long as 10 years!

The U.S. should be focused on winning the global war for talent, but obviously has decided to focus on other matters.  Tech firms hoping to compete with lower cost and more efficient programs in South America might find themselves losing to Chilecon Valley and the like.

I hope you’ve found this post interesting.  If you’re considering moving your business out of the United States, we can help structure it in a manner that is tax efficient and compliant.  Feel free to call or email us at info@premieroffshore.com with any questions.  All consultations are confidential and free.

Next up will be a review of Chile’s economy tax system, which was designed to go hand in hand with the U.S. Foreign Earned Income Exclusion.

ObamaCare Tax
Christian Reeves

Avoid the ObamaCare Tax, Offshore Edition

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The new ObamaCare tax, called the Net Investment Income Tax, or NIIT, hits U.S. residents and expats alike with a 38% levy on most forms of investment income.  If your taxable income in 2014 was $200,000 (single) or $250,000 (joint), the ObamaCare tax is coming your way.

  • These rates are fixed and will not increase with inflation.

The ObamaCare tax applies to the following forms of income:

  • interest,
  • dividends,
  • capital gains,
  • rental and royalty income,
  • non-qualified annuities
  • businesses classified as passive activities, and
  • income from investment and trading businesses.

Assuming you don’t want to pay any more than necessary to the Obamanation, there are a number of ways to amputate the ObamaCare tax.  For example, you can get a divorce or cancel the wedding to avoid the marriage penalty.  Two single people may earn up to $400,000 before paying in to ObamaCare, compared to a married couple who start contributing to the cause at $250,000.

If you have residency or citizenship outside of the United States, and can qualify to file as a nonresident alien, you will avoid the ObamaCare tax all together, regardless of your income.  That’s right, the NIIT doesn’t apply to nonresident aliens.

If your spouse won’t go for a divorce, and you don’t qualify as a nonresident alien, here are a few other suggestions:

One way around the ObamaCare tax is to give appreciated property to your heirs.  If their incomes are below the $200,000 and $250,000 thresholds no NIIT will be due.  This can also have significant estate planning and asset protection benefits.

As you may know, when you donate property to your children, who are minors or full-time students up to age 24, they must pay capital gains at your higher rate.  However, the ObamaCare tax does not apply to this kiddie tax.

Another solution to the NIIT is to form a Family Foundation and donate appreciated property to that Foundation.  This allows you to maintain control over the property, take a deduction for the fair market value on this years return, and then transfer small portions each year to a charity.  This allows you to maximize your deduction and avoid both the capital gains and NIIT taxes… all while maintaining control over the assets.

  • If you don’t need to control the distributions over a number of years, you can achieve the same benefits by donating the appreciated property to a traditional charity.

You can also cut out the ObamaCare tax by lending money to your onshore or offshore business.  Interest income from a third party is taxable under the NIIT, but interest coming from your own business is not.  This is a rather strange differentiation, but should motivate you to invest in your business.

Along the same lines, if you take an active roll in a business, rather than being a passive partner, dividends and royalties from that company are not subject to the ObamaCare tax.

An active roll, or, more properly, material participation, means that you spend at least 500 hours per year in the business, you are the primary worker, or you can show a consistent work history in the company.  Special care should be taken when converting from passive to active, as other taxes might outweigh the NIIT.  But, it is quite possible for this to save you money.

If your business is offshore, and you qualify for the Foreign Earned Income Exclusion, then you should be taking out the full exclusion each year to maximize the benefits of being offshore.  This means you (and you spouse) should be taking $99,200 in tax free salary from your offshore company in 2014 and holding any excess as retained earnings in the offshore corporation.

The ObamaCare tax doesn’t apply to this salary.  As you will be an active participant in the business, which is why you qualify to take the FEIE, you will also avoid the NIIT on interest, dividends and royalties this business generates.  When combined, these savings should be major incentives to invest in your offshore company.

  • If your offshore company needs cash, take the full FEIE salary and lend back whatever is requires.
  • Note that these benefits do not apply to an onshore or offshore company in the business of trading financial instruments or commodities.

Keeping the trend going, you can rent property to your business and avoid the ObamaCare tax on these payments.  The NIIT usually applies to rental income, but not if it comes from your onshore or offshore company.

Leaving offshore companies behind, you can also avoid the ObamaCare tax when you sell your real estate by doing an exchange rather than a traditional sale.  A Section 1031 exchange allows you to swap one like-kind property for another and defer the capital gain until you sell the acquired property.  A 1031 exchange also defers the ObamaCare tax for as long as you hold the property.

“Like-kind” means that the property you swap for must be similar to the one you are giving up.  So, you can transfer one business property for another, one rental for another, etc.  However, you may not swap a U.S. property for a foreign property.  You must swap a U.S. property for another U.S. property… and you may exchange a foreign property for another foreign property.  The foreign properties need not be in the same country.  The only requirement is that they both be outside of the United States.

My last suggestion on how to eliminate the ObamaCare tax is that you might sell your losing stocks and use these tax losses against your winners.  This common tax mitigation strategy works against the NIIT as you may net capital gains against capital losses and calculate the ObamaCare tax on the net.  Even better, you can use a carry forward loss against current year gains to keep the NIIT at bay.

I hope you have found this article on cutting out the ObamaCare tax helpful.  If you have questions about forming or operating an offshore company, please contact me at info@premieroffshore.com.  I will be happy to work with you to structure your offshore business and keep it in compliance with the Internal Revenue Service.

Offshore Investment
Christian Reeves

Quotes from Financial Giants Applied to Offshore Investment

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These are my favorite quotes from the giants of finance that I apply to my offshore investment and my offshore business.  If you want to manage your offshore investment portfolio, follow this advice to diversification and wealth.

The two quotes that I follow in every offshore investment that I make, and in my business (which is based in Panama), is a combo from Warren Buffet and Peter Lynch.  Mr. Buffet says to “only invest in what you know and at the right price,” while Mr. Lynch says, “Buy what you know!”

I believe firmly one should only make investments, be they onshore or offshore, that you fully understand.  For this reason, much of my offshore investment is putting capital back in to my own business.  It also means that I thoroughly vet all rental real estate properties I purchase, and focus on hard assets, such as gold and wood.

To achieve this goal, I have taken control over my retirement plan.  Only I have the time, motivation, and am willing to spend the money necessary to vet each and every offshore investment.

If I left my retirement accounts to a U.S. advisor or custodian, he is not going to spend the time necessary to research, visit, and analyze a condo in Medellin.  He doesn’t make that kind of money from my accounts.  On the other hand, I expect a significant return from each and every offshore investment, so I am willing to spend my time, effort, and money to guarantee a high return to my IRA.

Next is Thomas Rowe Price, Jr., founder of T. Rowe Price & Assoc., probably not someone you’d expect me to be citing, too.  Premier makes quite a bit out of taking your retirement accounts and investments away from these big firms and under your control.  Well, my favorite quote attributed to Mr. Price is, “Most big fortunes result from investing in a growing business and staying with it through thick and thin.”

I interpret (or spin) this to mean we should make each offshore investment in a growing, tax efficient business and, if you own or control that business, even better.  Only you know for certain how your business is doing and are willing to fight through any adversity to keep it going.  Make your offshore investment count – invest in your business or start a joint venture offshore with a partner committed to these same principles.

Next, I’m a fan of Carl Icahn, who once said, “Complain loudly to force improvement.”  As you may know, Mr. Icahn rose to prominence as a corporate raider in the 1980s, and is now considered an activist investor… a term I guess means he or the industry has softened its approach.

In either case, Mr. Icahn invests in under-performing companies, complains loudly, and turns them around.  One way to apply this to an offshore investment or an offshore business is to bring American efficiency and work ethic to Latin America.  By pushing your employees, and complaining loudly about inefficiency, you are sure to increase revenues.

Also, because your investment is in a region with lower wages on average, you are able to compensate those who live up to your expectations.  You may have a tough time implementing this in some countries, but others, like Panama, already know what to expect and are more willing to adapt.

Now for two classics.  First, Nathan Mayer Rothchild (1777 – 1836) said that “information is money.”  This is the most important quote in this post for the American making an offshore investment in Latin America.  The bottom line is that there are two prices for many offshore investments, the local price and the gringo price.  The only way to avoid the gringo price is through information.

Keeping in mind that there is no MLS system for real estate in South and Central America, you must come about information the old fashioned way, just like Nathan Rothchild.  You need to build relationships, do your due diligence, speak to as many locals and real estate people as possible, and build a reliable spreadsheet of prices in each region in the city.

For example, you should be aware that name brand real estate agents in Panama often buy and flip property to an American to increase their profits.  I have also seen them push up the price and take a kickback from the seller.  Only through research and local knowledge will you be able to ferret out the best deals.

These backroom deals are common knowledge among Panamanians.  I have rented many apartments, and I am always asked if I want to offer the unit at the local rate or the gringo rate… which means I will need to wait for a sucker to come along, but will receive a higher monthly fee… often 50% or more than the local rate.

And this goes back to my first point of invest in what you know and at the right price.  Only someone willing to do the research in order to understand the market and the culture will have the information necessary to make an offshore investment.  There is no way your U.S. IRS custodian will be willing to put in this kind of time.  Information will ensure you get the best deals and can make a significant difference offshore.  But, you must be willing to work for and spend to obtain that information.

Second is Roger W. Babson (1875 – 1967), who said “diversification, caution and no margin debt are the keys to investing.”  Today, the only way to truly diversify is to go offshore.  If you diversify out of the United States, and out of the U.S. dollar, you are protecting against country and currency risk, which many believe are quite significant at this time in our history.  I also believe this should lead you to physical assets, such as gold and wood on the conservative side of your ledger and real estate with significant upside on the aggressive side of your offshore investment portfolio.

I personally don’t recommend leverage or margin debt in your retirement account.  I believe the only place for leverage in your offshore investment portfolio is in income producing real estate.

Margin interest increases your gains, but is also increasing your risks.  This is especially true with margin debt on currency trading, which can reach 100 times.  Very few should be taking these kinds of risks with their retirement money.

Of course, many don’t agree with me or Mr. Babson.  If you use margin debt in your retirement account onshore, then you must pay 35% tax on the income derived from this leverage, called Unrelated Business Income Tax or UBIT.  This UBIT is eliminated by taking your IRA offshore.  So, moving your retirement account offshore, and adding a UBIT Blocker Corporation to your offshore company structure, is the best way to go against the traditional wisdom of not using leverage in a retirement account.

The best quote and argument for taking control of your retirement account also comes from Mr. Babson.  He said, “Tell your dollars where to go rather than asking them where they went.”

By taking control of your retirement account, and directing those dollars to well researched higher yields and/or more diverse assets classes, you will be buying what you know and securing your retirement.

I believe William F. Sharpe sums up my feelings on offshore investments quite succinctly.  “Understand your risks!”

If you buy what you know, and have sufficient information to understand the market and, maybe more importantly, the culture in to which you are investing, then you will understand the risks of a particular offshore investment.  When you know your risks, you can take steps to mitigate those risks.

I will close with a quote from Alexander Hamilton (1755 – 1804), who said “sovereign strength begets financial stability.”  A basic reading of this statement will lead you to invest in countries which are stable and encourage you to do your research on the currency and balance sheet of any nation you are thinking of making an investment in.

On a deeper level, it might cause some to look back at the United States and see a country that has lost much of its sovereign strength because of its ever weakening financial position.  When you consider that holding accounts in U.S. dollars is a form of investing in the U.S., you might decide to modify your portfolio mix.

I will leave it here because I prefer to focus on the facts of offshore investment and doing business abroad.  I try, and sometimes fail, to keep politics out of it.

As a parting shot, here is one more quote from Mr. Hamilton:  “A nation which can prefer disgrace to danger is prepared for a master, and deserves one.”

Dollar Will Fail
Christian Reeves

The Offshore Tax Inversion

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What the heck is an offshore tax inversion and why should I care?  The inversion has been all over the news and was even called “un-American” by our President today (July 25, 2014).  Here is everything the small to medium sized business owner needs to know about the tax inversion.

Where a large corporation is headquartered is called its tax home.  Its tax home is usually where its “brain trust” is located… where its President, CEO, CFO, and primary decision makers reside, often the tax home of a world-wide conglomerate.

Where a corporation tax home is located determines which laws guide the business.  So, if your tax home is in the United States, then the U.S. laws control.  If you move your headquarters to a country that is business friendly and has less onerous lax laws, then that nation’s laws govern.

An offshore tax inversion occurs when a large corporation headquartered in the U.S. acquires another large corporation located in a tax friendly jurisdiction, such as Ireland.  Then, they move the decision makers to Ireland, turning it in to their headquarters and thus their tax home.

Once the offshore tax inversion is complete, U.S. tax laws only apply to any officers or production facilities located here.  Most tax inversions are done to save many hundreds of millions in taxes on worldwide income and to get away from the complex sections of the U.S. tax code, such as the Controlled Foreign Corporation and Passive Foreign Investment Company rules.

A tax inversion can be compared to an individual changing his citizenship and moving out of the U.S.  All U.S. citizens are taxed on their worldwide income.  If you dump your U.S. passport and move to a country with more favorable tax laws, you probably won’t pay tax on your worldwide income… just on your local income.

In much the same manner, a corporation changes its domicile and tax home through an offshore tax inversion.  Once its headquarters are moved, it only pays U.S. tax on its remaining U.S. operations.

While the offshore tax inversion is used by large corporations to get out of the U.S. tax system, there are other provisions of the U.S. code that allow smaller businesses to do the same.

Those of us with a smaller operation can take our business and ourselves offshore, qualify for the Foreign Earned Income Exclusion, and earn up to $99,200 per year free of Federal Income Tax using an offshore corporation.  If we leave some employees in the U.S., we will pay some tax to the U.S.  If we get rid of all U.S. ties, we can eliminate U.S. tax all together… even if our sales are to U.S. persons.

  • Tax is based on where you and your business are located, not by where your customers are.

If you are thinking about moving your business offshore, please start by browsing my articles on the Foreign Earned Income Exclusion.  Basically, you need to move abroad and become a resident of another country or be out of the U.S. for 330 of 365 days to qualify.

Next, you can form an offshore corporation and draw a salary up to the FEIE amount.  If a husband and wife are working in the business, and both qualify, each can take a salary and you’ll (basically) get to earn $200,000 free of U.S. tax.  If your business profits exceed this amount, you may retain earnings in your offshore corporation and defer U.S. tax for as long as you like.

You’ll find a number of articles on this site describing how to take your business offshore.  If you have any questions, please send an email to me at info@premieroffshore.com.

Return on U.S. Treasuries
Christian Reeves

The Real Return on a U.S. Treasury

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The real return on U.S. Treasuries is a miserable 0.6% per year.  If you don’t think you can do better than this offshore, then leave your retirement with Fidelity and risk it being taken over by the U.S government and MyRa.

If you think you can beat the real return on U.S. Treasuries by diversifying out of the United States and out of the U.S. dollar, then get your retirement account out of harms way ASAP.

If you buy a U.S. Treasury bond today (July 2014), which is due in 2024, the yield to maturity is 2.6%.  If you subtract inflation from this lofty percentage, it becomes a miserable 0.6% per year.

If you, like many of my readers, are concerned with the U.S. dollar and the possibility of significant inflation in America, you can always buy a TIPS bond.  The TIPS protects against inflation and is returning all of 0.4% per year.

There has been a lot of talk of late that the U.S. will nationalize the retirement account system and block foreign investments.  If this happens, all retirement accounts will be transferred to government control and forced to buy U.S. Treasuries, the most secure investment around… and the nationalization will be sold as protecting Americans.

Now, I don’t know if this will occur, but I do know how to protect you from the possibility.  Take your IRA offshore now, by moving it in to an Offshore IRA LLC.  This will give you control over your assets and investments, all while keeping the government out of your affairs.

If the return on U.S. Treasuries excites you, and you don’t believe the U.S. will come for your retirement account, then do nothing.  If you want to protect your assets and diversify offshore, please take a read through my various articles on offshore IRAs.

As I said, I don’t know what will happen, but I know how to eliminate the risk.  Most advisors agree that, once your IRA is offshore, it will be grandfathered in and no changes in the law will affect its status.  Therefore, time is of the essence.

The reason for this opinion is simple:  it would be near impossible to force the sale of real estate and physical assets (like gold) that are held offshore.  It is much more likely that future formations will be prohibited.  Those already setup will be allowed to continue.

“Tell your dollars where to go rather than asking them where they went.” – Roger W. Badson, 1875 to 1967

If you have any questions, feel free to phone us or drop me an email at info@premieroffshore.com.  I will be happy to work with you to get your account under your control and out of the United Sates.

IRS Collection Statute
Christian Reeves

IRS Collection Statute for Expats

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A few days ago I wrote an article on dealing with the IRS as an expat.  Apparently, a number of you are carrying tax debt and are concerned with the IRS collection statute – how long the IRS has to collect that tax debt.  This article is specifically for those living abroad that owe the IRS.  The IRS collection statute might just be the fresh start you have been looking for.

The basics of the IRS collection statute are these:  They have 10 years to collect from you once a tax is assessed.  A tax is assessed when you file a return, an audit is completed and your appeals run their course, or the government computers prepare a return for you based on whatever information they may have (called a substitute for return).

If you never file a return, and the IRS doesn’t prepare one for you, the IRS collection statute never starts.

The IRS collection statute is placed on hold whenever the IRS is prohibited by law from collecting from you.  This is usually when you file an Offer in Compromise, a Collection Due Process request, or bankruptcy.  These can delay the IRS collection statute for many months or years.

Not to hurry the lead, but the IRS collection statute is put on hold while you are out of the United States.  More specifically, Sections 6502 and 6503(c) of the U.S. Tax Code work together to extend the collection statute if you are out of the U.S. for “a continuous period of six months or more.”

That is to say, if you are out of the U.S. for any six month period, the IRS collection statute is extended.  If you return every few months, so you are never gone for six months, then the IRS collection statute is never tolled.

Application of the IRS Collection Statute

If you incur a U.S. tax debt while living abroad, and you never set foot in America, the collection period never starts.  If you incur a tax debt and then move abroad, again never visiting your country, the collection period (basically) never starts.

Conversely, if you’re visiting family in the U.S. every few months, even for a day or two and thus never out of the country for a continuous period of at least six months, the IRS collection statute is running and the debt will expire in 10 years.

If you incur a U.S. tax debt while abroad, and then return to the U.S., the collection statute starts when you touch down.  So, if you are traveling to America from time to time, you might want to make sure you are never out for six months.

There is one more minor issue for expats.  If you are out of the U.S. for six months or more, and when you return the IRS collection statute is about to expire, the statute is automatically extended for six months.

Basically, if you are out of the country for six months or more, the IRS will always have six months after your return to get you and your assets.

Now let’s talk about the practical implications of the IRS collection statute on expats.  Most of you will find that the IRS computers stop sending you bills, and that your debt will drop off and out of the system, after ten years.

If the great collector ever gets its act together, and compares the travel days claimed on IRS Form 2555 filed with your personal return, expats with tax debts might well have an issue.  So far, this has not happened and the collection statute is running… at least the computers are processing bills as if the debts have expired.

If you want to know how much you owe the IRS, you can phone them and ask for a Transcript of Account.  This will tell you which years show a balance due, as well as the tax, interest and penalties that have accrued.

If you know you owed for a particular year, and think the 10 year collection statute may have run, you can call the government and ask the status of a particular year.  Though, I wouldn’t mention to them you are living abroad.

I hope this post helps to clarify the IRS collection statute and how it applies to expats.  If you have any questions, feel free to call or send an email to info@premieroffshore.com.

IRS Audit Statute
Christian Reeves

Offshore IRS Audit Statute

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For most Americans, the IRS audit statute, the amount of time the IRS has to come after you once you have filed your return, is three years.  Not so for those with foreign accounts and foreign assets.  In most cases, the IRS has six years to audit your international investments.

First, let’s review the IRS audit statute of limitations.  Basically, it says that the IRS has three years to come after you once your file a tax return.  If you never file, the IRS audit statute never starts… so file your returns.

There are several exceptions to this three year IRS audit statute of limitations.  For example, if you omit more than 25% of your income, the three year statute is doubled to six years.  Which is to say, if you have a substantial understatement, the IRS has six years to find it.

  • It is common for tax preparers to allow returns with aggressive deductions that don’t exceed 25%.

Also, there is no IRS audit statute of limitations for fraud.  If the IRS can prove fraud, which is tough for them to do, they can go back as far as they like.  In practice, it is rare for the IRS audit statute to be extended beyond six years.

For U.S residents who keep their money at home, the IRS audit statute of limitations is linked to your income.  If you make $100 million, and make an error of $10 million, the statute will not be extended to six years without a showing of fraud on your part… again, the IRS’s burden on fraud is high, and so it is not used too often.

For those of us living, working, or investing abroad, it’s a different story.  If you omitted more than $5,000 of foreign income from your return, regardless of your total income, the IRS audit statute is doubled to six years.

That’s right… if you made $100 million, and inadvertently omitted $5,000 of foreign income from your personal income tax return, your IRS audit statute is six years.  And, this increase applies to every aspect of your return, not just your foreign source income.

Even worse, and as I stated above, if you never filed a particular return, the audit statute never starts.  So, even if you reported all of your foreign source income, but you did not file an offshore corporation return (IRS Form 5471) or an offshore trust return (IRS Form 3520 and/or 3520-A), the IRS audit statute for these foreign structures never started.

The same holds true for the Foreign Bank Account Report form, commonly called the FBAR.  If you never file this form, the IRS can audit your offshore bank accounts as far back as they like… and impose penalties of up to $100,000 per year.

And this is one of the ways the IRS goes after expats and those with foreign assets even after the six years has passed.  You might have included some, but not all, of your foreign income on your return and were just waiting for the three year or six year IRS audit statute to pass.  Well, if you did not file the forms required in addition to your 1040, your clock never started to run.

I note that failure to file the FBAR, financial asset report and offshore company or offshore trust forms extends the IRS’s time to audit those forms, as well as add any tax due to your personal return.

In addition to the items above, which are specific to those of us living, working, and investing abroad, there are other ways your IRS audit statute can be extended.  The most common is by mutual agreement between you and the IRS.  If you are being audited and either side needs more time, you will be asked to sign an IRS audit statute extension.

Most of us in the tax representation game suggest you should extend the statute whenever asked.  The reason is simple:  if you don’t agree, the IRS assesses whatever additional income you have and disallows all expenses and deductions you took on your return.  From here, you can fight it out with appeals and the IRS audit statute is not an issue… the audit is over.

Your IRS audit statute can also be extended by your filing an amended return.  If you file a return with an increase in tax (balance due) within the three year audit statute, your statute is not increased.  If you file a return with a balance due after the statute runs out, the IRS gets one year to revise it.  So, file your amended returns with a balance due 60 days before the statute runs out and cut the Service off before they get to you.

  • An amended return that does not have a net increase in tax does not extend the IRS audit statute.

Understanding the IRS audit statute can become a major issue and determine how far you want to push the envelope.  It begins with you filing a return, so always send in your returns by certified mail or file electronically.

Note that this article is focused on the IRS audit statute.  Your state may also treat your domestic and international source income differently.  I will mention that my State of California has a four year audit statute rather than the more traditional three year period.  You should check with your local office.

Offshore IRA
Christian Reeves

Invest in What You Know with an Offshore IRA

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Follow the advice of Warren Buffet and many others who came before him and invest in what you know.  An offshore IRA gives you the power to diversify offshore and invest in what you understand at the right price.

An offshore IRA placed in an offshore company, where you are the manager of that company, gives you checkbook control.  The IRS can then pay your research and travel expenses and you can buy what you know, which is not possible in a self directed IRA.

  • The offshore company is usually structured as a limited liability company.

In a self directed IRA, you can recommend investments to your custodian or advisor.  If he is comfortable with the investment, he will proceed.  If he is not, then he will block the transfer… which is quite common with offshore investments.

The bottom line is that the custodian does not have the time or desire to understand and vet the offshore project.  Are you going to pay him thousands to visit a build in Panama?  Probably not… but you are willing to spend your time and money to get to know the city and the investment.

  • The custodian has some liability if the investment goes south.  In an offshore IRA LLC, this is all on your shoulders.

So, while an offshore real estate investment is filled with risk and uncertainty for the self directed custodian, it is something you can become knowledgeable in, which means it is the perfect investment for your offshore IRA.

If you want to research and invest in high returning international real estate or hard assets, like physical gold or wood, you should be making these investments through an offshore IRA held by an offshore company.

You should only buy what you know, and you are the only one who is willing to spend the time and make the effort to get to know a real estate project offshore.

Offshore business tax reporting
Christian Reeves

Offshore Business Tax Reporting Summary

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If you’re operating a business outside of the United States, your offshore business tax reporting obligations can be daunting.  Failure to comply can result in significant interest and penalties, the loss of your business, and even the loss of your freedom.  Here is a brief description of the most common offshore business tax reporting obligations.

The first and most important offshore business tax reporting obligation is not about paying taxes, but reporting where your assets are located.  FinCEN Form 114, commonly referred to as the FBAR, requires you to disclose your foreign bank accounts if you have more than $10,000 offshore.  This form requires the name of the bank, account number, account size, address of the bank, and whether you own the account.  Failure to file FinCEN Form 114 can result in a penalty of up to $100,000 per year and 5 years in prison.

The next non-tax offshore business tax reporting obligation is IRS From 8939, “Statement of Specified Foreign Financial Assets.”  This one expects you to disclose all assets and investments you hold outside of the United States.  It is only required if you have “significant” assets abroad, so check the instructions for the filing requirements.  They vary depending on where you live (in the U.S. and abroad) and whether you are married or single.

There are several exceptions to Form 8939.  For example, you do not need to report gold you hold in a vault nor real estate that you hold in your name.  For more information, please see my articles on gold and offshore real estate.

The balance of your offshore business tax reporting obligations are in concert with your personal income tax return (Form 1040) and the forms are attached there, too.  For example, you should be drawing a salary from your offshore company of up to the Foreign Earned Income Exclusion and retaining earnings in excess of this amount ($99,200 for 2014).  To accomplish this, you will attach Form 2555, “Foreign Earned Income,” to your personal return.  This form requires information on your employer (the offshore company you own), your salary, foreign residency if any, and your travel days to and from the United States.

The largest (in terms of number of pages) offshore business tax reporting item is IRS Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations.”  This is a full blown corporate tax return, akin to IRS Forms 1120 and 1120-S.  It will require information on the owners and shareholders of the offshore business, as well as Profit and Loss and Balance Sheet data.  It includes a variety of forms and schedules and is attached to your personal income tax return.

Because Form 5471 goes in with your personal return, it is due whenever your 1040 is due.  If you’re living in the U.S. on tax day, you need to mail it by April 15.  If not, you can get an automatic extension to October 15.  If you are living outside of the U.S., you get an extra two months to file.

If you will use an offshore Limited Liability Company to hold intellectual property, or to manage personal investments, you will file IRS Form 8858, “Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.”  This form allows you to create subsidiaries of your parent corporation and eliminates corporate level tax on passive investments that you wish to flow through to your personal 1040 or Form 5471.

Finally, if you will hold your business inside an offshore trust for estate planning, privacy and asset protection purposes, you may need to file IRS Forms 3520 and 3520-A.  These will allow you to hold your offshore business in an offshore asset protection trust and may provide significant tax benefits if your estate is over $5 million.

The bottom line of IRS Forms 3520-A and 3520 is that income from the trust will flow through to the settlor’s personal income tax return (your 1040).  Only at your passing will your heirs need to begin reporting and paying tax, albeit at a stepped up basis.

I hope you’ve found this post on offshore business tax reporting interesting.  See our tax section (top right of the website) for more detailed information.  If you are interested in receiving these posts by email, please sign up for our free email newsletter.

U.S. Source Income
Christian Reeves

What is U.S. Source Income?

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All income that is U.S. source income is taxable in the United States.  Income that is not U.S. source income is not taxable.  So, planning to ensure your business income is not considered U.S. source income is the only way to keep Uncle Same out of your wallet.

This article will describe U.S. source income and tell you how to avoid it in your offshore company.  From here on, I will assume that you are living and working abroad and that you qualify for the Foreign Earned Income Exclusion.  If you are not sure you qualify, please check out the various articles on these topics before reading on.

Your offshore company must pay U.S. tax on any U.S. source income, so a quality international tax plan will do everything necessary to ensure you have no U.S. source income.  Note that whether your profits are U.S. source income is not determined by where your clients are located.  It is based on where you and your company are doing business.  If your business is operating from Panama, and all of your customers are in the United States, you probably do not have U.S. source income.

In other words, if your offshore company has minimal contacts with the United States, then it does not have U.S. source income.  If your offshore company has significant ties to the U.S. then you probably have U.S. source income (U.S. Tax Code Section 882).

The income earned in your offshore company is U.S. source income, and thus effectively connected to a U.S. business, if you have an office, employees, or other similar connections to the United States.  Even if most of your operations are in Panama, and you have an office in California, you will have some U.S. source income (U.S. Tax Code Section 86(c)(1)-(3)).

If you don’t have employees in the U.S., you are not necessarily safe from U.S. source income.  There is much planning that goes in to ensuring your offshore company’s contacts with the U.S. don’t rise to the level of being engaged in a business within the United States.

The simplest case is when you have an internet based business in Panama, selling an electronic product, such as a book delivered by email.  Assuming all staff and banking is in Panama, you have no U.S. source income.

If we take the same example, but we move banking and credit card processing in to the United States, assuming no other contacts, you still don’t have U.S. source income.  An offshore company with bank and merchant accounts in the U.S. is not conducting a business in the U.S. for tax purposes and thus has no U.S. source income.

Keep in mind that it does not matter where your customers are located.  Title/ownership of the electronic product passes to the buyer in Panama, where the business is located.  Even if 100% of your customers are in the U.S., you are safe.

Add to this a website and IT in the United States and you still do not have U.S. source income.  Hosting your internet e-commerce site in the United States does not create sufficient contacts to result in U.S. tax.

Now, let’s change the electronic product to a physical product such as a new miracle vitamin.  If you don’t set up a plant that manufactures the vitamin, you will have U.S. source income.  If your Panama company contracts with an unrelated/independent fulfillment house, you can avoid this tax issue.

To clarify, the independent fulfillment house must be providing similar services to other companies, and not be controlled by you.  If it were, it may be considered a branch of your Panama company.

The safest scenario is a fulfillment house that is manufacturing the same or similar products for many firms, slapping your label on the bottle, and shipping it to your customers.  Again, so long as this is an arms length transaction, it will not result in U.S. source income.  See IRS Treasury Regulation 1.864-7(d)(3)(i) and 1.864-7(b)(1).

Since we are piling on, let’s now assume you are marketing your business through an affiliate marketing group.  For those of you not so tech savvy, an affiliate marketer is someone who advertises your web page through search engines and pay per click to earn a commission on each sale they generate.  Leads are tracked by “cookies” that are saved on to your computer each time you click on one of their links.

I believe contracting with an affiliate network is safe and will avoid U.S. source income.  In an affiliate network, you pay the network (i.e. management firm) and they pay their agents.  If these agents are independent contractors, then the network is responsible for issuing 1099s and U.S. tax issues.  See U.S. Treasury Regulation 1.864-7(d)(3)(i).

I strongly recommend working with affiliate networks rather than contracting with individual affiliate marketers.  If it was found that your affiliates are employees and not independent contractors, in a payroll tax audit, then some of your income may be deemed U.S. source income.  The U.S. would like nothing better than to tax a Panama corporation.  The risk of having the marketers reclassified as employees is eliminated with a network.

I will conclude by pointing out that the U.S. source income tax rules are not an “all or nothing” proposition.  If it is found that you have both U.S. source and foreign source income, then only that income earned in the U.S. will be taxable in the U.S.  Foreign source income will still be eligible to be retained in your offshore company.

In that case, the calculation of what is U.S. source income and what is foreign source income is referred to as transfer pricing.  You and the IRS must agree on how much value is being added to the product (your vitamins) by your sales office in the U.S. and how much value is being added by the office in Panama.

If the transfer pricing analysis finds that 50% of the value of the bottle of vitamins is being derived from the work you are doing through your branch in the U.S., and 50% is being created by the parent company in Panama, then half of the net profits from the sale of the product is taxable in the U.S. and half can be attributed to Panama and retained in that offshore company as active business profits.

If you are considering forming a business outside of the United States, proper planning will consider these U.S. source income rules.  Please call or email us at info@premieroffshore.com if you are considering forming an international business.  We will be happy to design and incorporate an offshore company that will maximize your tax benefits and keep you in compliance with the U.S. IRS.

Chile
Christian Reeves

Controlled Foreign Corporation Defined

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If you are doing business offshore, you need to understand the IRS Controlled Foreign Corporation rules.  It is these tax laws that allow you to retain earnings from an active business offshore.  These same rules force you to pay tax on passive income.  If you have a non-U.S. partner, then avoiding the Controlled Foreign Corporation rules is great international tax planning.

Any business that is incorporated outside of the United States with a U.S. shareholder or shareholders directly or indirectly owning or controlling more than 50% of the entity and is a Controlled Foreign Corporation for U.S. tax purposes (Section 957 (a)).

It is important to note that it is more than 50% of the vote or control, which is another way to say ownership or control of the company.  So, while you might assign nominee directors and voting proxies to an offshore corporation, so long as a U.S. person is pulling the strings (control), the entity is a Controlled Foreign Corporation.  Back in the day, nominees were powerful tools.  Under current IRS rules, they are of little value.

Indirect ownership of a Controlled Foreign Corporation can also refer to shares held by your children.  Even if they are not U.S. persons (you are living outside of the U.S. and they don’t hold U.S. passports), the attribution rules mean the offshore company you and your kids control is a CFC.  See Section 958(b).

These same attribution rules apply to ownership of the offshore company by a foreign trust.  Most offshore trusts are taxed as grantor trusts.  In that case, the settlor of the trust (presumably you) is deemed to be the owner of the shares of the company because you control the trust.

If the offshore company is owned by an offshore trust that is not a grantor trust, your heirs are usually the beneficiaries.  In that case, ownership is attributed back to you, the settler, and, again, the offshore company held by the offshore non-grantor trust is considered a Controlled Foreign Corporation.

What Does Being a Controlled Foreign Corporation Mean?

So, what does it mean to you, the American business person operating abroad, that your offshore company is a Controlled Foreign Corporation?  It means that the subpart F anti-deferral rules defined in Section 951 of the U.S. tax code apply.  These rules disallow continued reinvestment by forcing the distribution of certain types of income, summarized as passive income.  It also means that these types of income, regardless of whether actual corporate dividends are paid, will not be eligible for U.S. income tax deferral as retained earnings.

Now, let me translate that into English.

Because your offshore company is categorized as a Controlled Foreign Corporation, you don’t get to defer U.S. tax on passive income and capital gains the business generates.  Assuming you are living and working abroad, and qualify for the Foreign Earned Income Exclusion, you can defer U.S. tax on active business income by holding it in the company, but not passive income.

Also, if you have passive income, such as capital gains and interest on your investments, and you don’t pay it out to the shareholders, those owners are still required to report and pay tax on it.  This often frustrates partners because they are paying tax on money they did not receive, but that’s offshore tax law for you.

Let’s say you are living and working in Panama, and operating your business through a Belize entity to minimize or eliminate tax in Panama.  That company nets $300,000 in profits this year (2014).  You and your wife are both working in the business and both qualify for the Foreign Earned Income Exclusion.  Both you and your spouse should take out the maximum Foreign Earned Income Exclusion as salary from the Belize company.  Let’s round that up to $100,000 each, for a total of $200,000.

As a result, the offshore company has left over profits of $100,000.  The Controlled Foreign Corporation rules allow you to keep that $100,000 in the corporation and not pay U.S. tax on it until you take it out as a dividend or in some other form… which is great for you.  You are operating free of tax in Panama and free of current tax in the United States because of your structure.  Your U.S. taxes are deferred for as long as you leave the cash in the offshore company.

Now, let’s assume you’ve built up $1 million in retained earnings in your offshore company over a few years.  That cash generates $30,000 per year of interest income (a 3% return from your bank).

Because your offshore company is a Controlled Foreign Corporation for U.S. tax purposes, that $30,000 is taxable on your personal income tax return, Form 1040.  If you distribute it out to yourself, you have $30,000 in hand with which to pay the tax.  If you leave this interest income in the offshore company, you still must pay the tax.

There is only one way to avoid this Controlled Foreign Corporation issue.  If your business partner is not a U.S. citizen and not a U.S. resident, and he or she owns 50% or more of the venture, then the company is not a Controlled Foreign Corporation and may be eligible to retain passive income.

Note that you are still required to report an offshore company which is not a Controlled Foreign Corporation to the IRS on Form 5471.  So long as U.S. persons hold 10% of an offshore company, you will have U.S. reporting requirements.

I hope you have found this article on Controlled Foreign Corporations to be helpful.  For assistance in structuring your offshore company or business, please give us a call or send an email to info@premieroffshore.com.  We will be happy to work with you to structure your affairs.

You can find additional information on this site on how to eliminate your U.S. filing obligations, such as Form 5471, the FBAR, and others… assuming you have a partner or spouse who is not a U.S. person for tax purposes.

Physical Gold
Christian Reeves

Buy Gold in an Offshore IRA

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When you buy gold in an offshore IRA, you create a hedge against currency risks, move assets out of the United States, and maximize asset protection, all the while maintaining the tax benefits of the retirement account.  Buy gold in an offshore IRA LLC to maximize the benefits of taking your retirement account offshore.

When you invest in only U.S. stocks and U.S. dollar denominated assets, you place your retirement at risk.  Diversify out of the U.S. by moving your retirement account in to an offshore IRA LLC and then buy gold in an offshore account.

When you buy gold in an offshore IRA LLC, you create a hedge against currency devaluation, economic turmoil, and volatile markets.  As I write this post, the price of gold is lower and more attractive than it has been in years.  But, I suggest you buy gold in an offshore IRA at almost any price.  When you hold gold as a hedge against catastrophic risks, it makes little long term difference where the spot price moves.  Buying gold in an offshore IRA LLC is the ultimate retirement insurance policy.

When you take your IRA offshore, you take control over all account decisions.  You choose your investment mix and can reduce volatility and risk while safeguarding your standard of living.  This type of control is not available onshore.  Yes, you can form a domestic IRA LLC, but you will be limited to U.S. investments and tied to the U.S. government.

*Tax Tip:  You are not required to report gold held in your name offshore.  This is not an issue for gold in an offshore IRA, but it is for those who buy in a taxable account.  For more information on this topic, check out my article on gold.

Note that I am referring to physical ownership of gold and other hard assets.  I never recommend gold certificates or holding facilities like Perth Mint.  Unless you take possession of the assets, they must be reported to the IRS and are not a true hedge against catastrophic events.

When you buy gold in an offshore IRA, you have the same tax benefits and responsibilities as if you made the investment in the United States.  You are acting as the investment manager for your offshore IRA and must follow U.S. rules while offshore.  This means that you may buy gold bullion and Golden Eagle coins, but you may not buy collectable gold coins.

When you buy gold in an offshore IRA, you must be buying it for the value of the gold.  If the coin has a value in addition to its gold content, it is probably not a permitted investment.

I recommend you buy gold in an offshore IRA and take possession of that gold.  We work with firms in Zurich, Switzerland and Panama City, Panama that offer bullion in just about any amount and private vaults that will store it in complete anonymity.  The private vault company we work with in Panama will allow you to store just about any investment asset.

If you search the web for how to buy gold in an IRA or how to buy gold in an offshore IRA, you will find a number of U.S. providers.  There are even some U.S. firms offering to buy foreign gold through a self directed IRA, without an offshore LLC or offshore bank account.  This makes no sense to me.  There is no value to going offshore if you are not going to take control over the investments.

When you use a self directed IRA, you can “direct” the custodian to make certain investments.  You can’t force him to make an investment, but you can request and suggest investments.  Also, all investments in the self directed account are under the control of the custodian/investment manager.  If the U.S. comes calling, and tells him to bring the money back to invest in U.S. Treasuries or in the MyRa scam (see my article on MyRa), he will do so.  You have very little control over the investments in your retirement account if things go bad or you want to make an investment that the custodian is not comfortable with.  If you are buying gold in an offshore IRA as a hedge against catastrophic risks, you must use an offshore LLC.

I also note that the self directed custodian/investment manager earns a transaction fee from each investment you ask him to make.  If he picks up the phone, he’s getting paid.  If you move your retirement account in to an offshore IRA LLC, you make the investments, choose your gold broker, your vault, and the level of protection you feel is necessary.  You will pay no transaction fees to the custodian.

If you want to buy gold in an offshore IRA, I suggest you go all in and dump the self directed U.S. controlled investment advisor/custodian.  When you form an offshore IRA LLC, you are the signor on the bank account, gold purchase contract, and the vault.  No one has access to or control over your investments.  If you go offshore, then go offshore.

To clarify, when you buy gold in an offshore IRA LLC, there is a U.S. custodian involved, but he has no control over your investments or accounts.  His job is to invest your retirement account in to the offshore LLC.  Once the money is in the LLC, the custodian is responsible for annual reporting to the IRS… that’s it.  He doesn’t charge a transaction fee on your investments in the LLC and has no control over your retirement assets.

As I said above, you must follow the same rules offshore as a professional advisor follows onshore.  My point is that the choice of what to do if the U.S. decides to force retirement accounts to invest in Treasuries, is yours.  The decision to comply or not comply is yours and not the custodian’s.

Also, most experts believe that offshore IRA LLCs will be grandfathered in should the IRS go after foreign transactions.  They may close IRAs and prohibit the formation of new IRA LLCs (or the funding of offshore structures), but it is unlikely they will go after existing entities.

If you buy gold in an offshore IRA, go offshore with an LLC.  If you plan on using a self directed IRA without an LLC, then save a few dollars and buy the gold in the United States.  There is no reason to go offshore with a self directed account.

I hope this article on why you should buy gold in an offshore IRA has been helpful.  We all come at risk and diversification from different points of view.  If you want a hedge against catastrophic events, move your assets out of harms way and out of the control of a U.S. custodian with an offshore IRA LLC.  If you think this risk is minimal, then a domestic self directed IRA is all you need.

Feel free to phone or email us at info@premieroffshore.com for a confidential consultation.  We will be happy to help you take your retirement account offshore and diversify out of the United States.

State Tax for Expats
Christian Reeves

State Tax for Expats

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If you are planning to live, work, or invest offshore, you need to plan for your state taxes.  This State Tax For Expats guide will help you eliminate your state’s taxes and keep you out of trouble with local tax authorities.

If you move offshore, and plan to return to your home state, then your state’s tax laws apply to all income you earn abroad.  So, state tax for expats battles center around the issue of your intent to return… whether you moved out of your state and took up residency elsewhere, or if you remain a tax resident of that home state.

If your state’s tax laws remain attached to your income, then you need to know how your state treats foreign income.  For example, some states have laws that match the federal government’s Foreign Earned Income Exclusion so you can earn up to $99,200 in wages while abroad and pay no federal or state tax.

Others have a variation of this law, while yet others, like California have no FEIE and thus attempt to tax ALL income you earn abroad.  You must research your state’s laws before you devise a plan to move offshore.  I’ll focus on California because that’s the state I’m most familiar with.  If you are living in a tax free state like Texas or Florida, your state tax for expats analysis is simple – no problems.

As I said above, State Tax For Expats is focused on your intention.  If you move abroad and intend to return to your home state, then its laws govern.  If you move to another country, become a tax resident, and do not intend to return, then you should have no state tax obligations.  While this sounds great, it is much more difficult to prove… especially if you are moving from a hungry and aggressive state like California.  I also note that the burden of proof is on you to show that you intended to move out of your state and not return for the foreseeable future.

For example, if you are a contract worker in Iraq, on a 3 year agreement, and you keep a home and family in California, you remain a resident of California for tax purposes.  No one will believe you intended to move to Iraq for the foreseeable future… you intended to work there for the term of your contract and then return to your home and family in California.

That is to say, your state will want its share if you leave sufficient contacts in that state.  If your wife, school aged children, home which you have not rented out on a long term contract, bank accounts, driver’s license, are all in California, you are probably a tax resident of California.  If your job is such that you obviously intend to return to California, then you are probably a tax resident of California.

Though, it is possible to be a tax resident of a foreign country and not a state in the U.S., while your wife and children are here.  I have had three clients over the years in that situation.  One was an attorney living and working for 15 years in the U.K., while his wife and kids remained in California.  He would spend about 30 days a year in the state.  Note that is one of the toughest state tax for expats situations, but it can be overcome.  In this case, he qualifies as a resident of the U.K.

Of course, California found a way to get to at least some of his worldwide income.  They passed a law that basically says the income of a family unit is attributable equally to each spouse.  This law passed legal challenges in community property states and means that 50% of the U.K. lawyer’s income is attributable to his wife’s support (taking care of the children, etc.) and is thus California source income and taxable in the state.

That’s right, if you are living and working abroad, qualify for Foreign Earned Income Exclusion, are a tax resident of a foreign country, and remain married to someone living in a community property state, 50% of your income is taxable in that state.  One solution is to get a divorce.  Some suggest that prenuptial or transmutation agreements may also help.

Adding insult to injury, because California has no Foreign Earned Income Exclusion, state tax applies to all California source income.  If the attorney were to earn $99,000, he would owe no Federal tax, but 50% of the income would be taxed by California at around 9%.  This is why state tax for expats can be so confounding to the uninformed.

Capital gains is another issue you must consider when dealing with state tax for expats.  Let’s say you move out of the United States to Panama.  You move to Panama permanently, obtain residency, file taxes (if applicable), become part of a community there, cut all ties with your home state by selling your home, etc.

However, you leave your bank and brokerage accounts in the U.S. and your state has no idea that you left.  They won’t get notice (Form W-2) from your job in Panama, but they will receive 1099s from your bank and brokerage accounts.  And, these 1099s will reflect only the sales, and not the purchases in that trading account.  This means the state will have a very distorted view of your income… all stock sales and no expenses/purchases.

California will take this information and prepare a return on your behalf, create a tax bill, and attempt to collect.  The first you may hear about this is when they empty out your U.S. bank and brokerage accounts with a tax levy.  Think I am exaggerating?  I have represented too many clients to count over the years in this very situation.  One was a day trader with a net loss on his brokerage account, but $1 million in sales for 2012.  California taxed that $1 million and levied his account for the balance due.  He was left to negotiate, beg, and file a claim for refund.  He had to prove he was not a resident of California, which is an uphill battle… especially after the government has a hold of your cash.

When dealing with state tax for expats, you have two options:  1) move everything out of the reach of your state, or 2) move to a state with no income tax for a year before you go offshore.  Option 1 will protect your assets, but option 2 will protect you AND avoid a confrontation.

Had my client moved his wife and child to Florida or Texas before going to work in London, he would have zero state taxes to pay.  Assuming his income was $99,000 (it was closer to $800,000), he could have also moved them to any state with a matching Foreign Earned Income Exclusion with the same result.

Likewise, you can first relocate to a non-taxing state, file a partial year return with your state referencing the change, and then go offshore without the risk of California coming after you.  This prevents the substitute for return issue, and makes an audit unlikely.  People in the military have been doing this for years.  Expats should take a page from the Navy’s playbook.

However, you must be sure to cut all ties with your original state and become a resident of Florida or Texas before going offshore.  You should sell or rent out any real estate (I am a big believer that selling is better than renting), close any bank and brokerage accounts in California and open new ones in Texas or Florida, get rid of your CA driver’s license, and cut all ties with California.

As you can see, it is important to be proactive when dealing with the state tax for expats issue.  Remember that these state tax problems can come back to bite you years after you move offshore, so dealing with them now will save you in taxes, interest, penalties, and fees to a CPA or Attorney.

IRS Levy
Christian Reeves

How to Settle Your Expat Tax Debt

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If you are a U.S. citizen living abroad, you have the same rights and responsibilities when it comes to your expat tax debt as those stuck in America.  The IRS has ever increasing powers to collect on that expat tax debt, so it is in your best interest to get into compliance and make arrangements to settle your IRS debt.

Maybe you read my post on the new Offshore Compliance Program, or you just decided it was time to come out of the shadows and file and settle your expat tax debt.  Maybe you had a very profitable year, followed by two low income years, and don’t have the cash to pay off the IRS.  This article is dedicated to you.  Here is how you can get the IRS off your back.

Expat Tax Option 1:  IRS Installment Agreement

If you owe money to the U.S. government, and have assets abroad, you can rest assured that the IRS will find a way to get to you.  While this might scare some, I say it to entice you to come forward, file and delinquent tax returns, and make payment arrangements.  Don’t make them chase you down.  I guarantee that will only make matters worse.

Just like the U.S. resident, the expat with an IRS tax debt has a right to an installment agreement.  Whether you owe $10,000, $25,000, or $100,000, you can set up a payment plan that will allow you to resolve your IRS debt over time.

If your expat tax debt is $20,000 or less, you can phone the IRS and ask to pay $500 to $1,000 per month.  They will usually accept such an offer and no financial information will be required.

If you owe more than $20,000, setting up an installment agreement is more complex.  You must complete IRS Forms 433-A and 433-B, which are detailed financial statements that describe your income, expenses and assets.  You will also need to provide proof of your income and expenses, such as 6 months of bank statements, rental agreements, proof of an auto payment, etc.  No, the government will not take your word for these items!

The key to resolving your expat tax debt is to produce an accurate financial statement that you and the IRS can live with.  You will agree to pay what you can afford, and if the government finds your expenses reasonable, you will reach an accord.  If you are able to pay off the debt within 24 months, the IRS will be lenient on your expenses.  If you are not able to make substantial payments, they will be more aggressive.

And it is these allowed standard expenses which are typically the focus of contention in expat tax debt settlement cases.  The IRS doesn’t want you living high on the hog while not paying your “fair” share.

For the U.S. resident, these allowed standards are set in stone.  You can go to www.IRS.gov and search for “collection expense standards” to find national standards and local standards for housing and utilities.  No such standards are defined for those with expat tax debts.  The IRS negotiates your allowed housing and living expenses on a case by case basis.  This means that much of the burden of proving what is reasonable falls on you.

Of course, this gives the U.S. expat a bit more room to negotiate.  The IRS agent can accept just about any amount which he or she finds to be reasonable.  So, if you will pay off the debt within a few years, and certainly well within the collection statute (more on this later), they can be more lenient with you.  Their hands are tied when it comes to these standards and the U.S. resident.

Expat Tax Debt Option 2:  Offer in Compromise

If you are not able to pay your expat tax debt over several years, and you don’t have assets (either in the U.S. or offshore), then you might be one of the very few who get an Offer in Compromise.

First, I would like to point out that much of the information available on the internet about the IRS Offer in Compromise program is false, misleading, or a scam.  Most promoters promise you “pennies on the dollar” deals but they are very few and far between.  Do your research and don’t fall for a scammer if you are considering an IRS Offer in Compromise.  This goes double for the expat, whose case for an OIC is even more challenging than the U.S. resident’s.

Next, while you have a right to an installment agreement if you can’t afford to pay the bill in full, you have no right to an Offer in Compromise.  An OIC is at the discretion of the IRS and depends on your situation and on the agent assigned to your case.  About 25% of the OICs filed are accepted.

In order to qualify for an IRS OIC on your expat tax debt, you must prove to the IRS that:

1)  There is some doubt as to whether the IRS can collect the expat tax debt in full – now or in the foreseeable future.  This standard is called “doubt of collectibility.”

2)  Due to “exceptional circumstance,” forcing you to pay your expat tax debt in full would be unfair, unreasonable, inequitable, or otherwise create an economic hardship.

Those of you who have followed my writings know that I was a U.S. tax attorney for over a dozen years.  In that time, I never saw one OIC approved under exceptional circumstances.  So, let’s talk about OICs based on doubt of collectibility.

First and foremost, doubt of collectibility DOES NOT mean that your assets are offshore and out of the reach of the IRS.  The government is to treat OICs and installment agreement requests from expats the same as they treat filings from U.S. residents.  They place no weight on the risks or expenses associated with collecting from an expat whose assets are secure.

Next, the expat has the same problem with the Offer in Compromise he did with the installment agreement:  the allowed expense standards are not well defined.  You and the agent might have very different ideas on what it takes to live safely and reasonably abroad.

While this lack of expense standards might be helpful in negotiating an installment agreement that will pay off your expat tax debt in a few years, they are a challenge in the IRS OIC program.  The IRS doesn’t like to give expats (or anyone for that matter) what they consider a free ride.  They might push down on your expenses to the point where an OIC is impossible.

If you can get past these issues, you have the same rights as the U.S. resident when it comes to the OIC.  In order to apply for the program, you should first take a look at www.irs.treasury.gove/oic_pre_qualifier/ to determine whether you are a candidate for the IRS Offer in Compromise.

When you submit an OIC, you must make a good faith payment, and pay the user fee.  The user fee is $150 and the good faith payment is 20% of your offer amount.  So, if you are offering to settle your expat tax debt of $100,000 for $10,000, you pay $150 + $2,150.

Expat Tax Debt Option 3:  10 Year Collection Period

Often the best expat debt relief option is running out the clock.  The IRS has 10 years to collect from you after you file your returns.  If the Service doesn’t get to your assets within that time, you usually walk away free and clear.

  • The clock starts when you file your return.  If you never file, the collection clock never stars.

If your forms have been filed for a number of years, and you are now concerned that the IRS collection efforts might reach you abroad, I recommend an installment agreement.  When you don’t have income or assets sufficient to pay in full, you can set up a partial pay installment agreement.  You pay what you can afford, again, according to the allowed standards (whatever they might be), until the 10 year collection statute runs out.

If you are coming up on this 10 year statute, don’t file an Offer in Compromise.  The OIC will put that collection statute on hold while the IRS considers your offer.  If you are not successful, this wait, often 1.5 years, has been for nothing.  You may be worse off because your ability to pay has increased in this time.

Rather than an OIC, apply for an installment agreement.  Considering your rights to appeal, this can take several months.  When it is done, you pay a few dollars each month and then walk away.

Expat Tax Debt Relief Option 4:  Innocent Spouse Relief

If your spouse is running a business that you are not involved with, and you can prove to the satisfaction of the IRS that it would be unfair to tag you with the resulting tax debt, then you might qualify for Innocent Spouse Relief.

The most common example for expats is where one spouse is operating a business abroad and the other is living in the U.S.  The expat runs up a big tax bill, you get a divorce, and the domestic spouse wants out from under the IRS.  So long as you did not know about the debt, were not involved in running the business, and did not financially benefit from the untaxed money, you might be an innocent spouse.

In my experience, about 20% of these filings are successful.  Basically, if your assets came from the business, the government will not let you go.  If your assets came from your work, and not your “guilty” spouse, then you might have a chance of success.

If one spouse is living and working abroad, and the other is in the U.S., there is a much easier solution to this issue than an innocent spouse claim.  It doesn’t require you to get a divorce and is guaranteed to improve your marital bliss.  I believe this to be the best advice I have ever given expats where only one spouse is involved in the business:

File your U.S. returns as Married Filing Separate.  Never file a joint tax return!

Yes, it will cost you a little extra each year, maybe $1,500, but it will keep the family unit together and protect the assets of the “innocent” spouse.  No one likes to admit that there is risk in the new business they are so excited about, but a little planning can make a big difference if things go south.

Expat Tax Debt Considerations

If you have an expat tax debt, there are a few issues you should keep in mind.  Among these, the most important is that you must be honest in your filings and report your foreign bank accounts each and every year.  The IRS has painted a very large and bright target on the expats and has put over 100 of you away in the last couple of years to prove its point.  While the average American might not end up in jail for an innocent error, it is a very real possibility for the U.S. citizen living and working abroad.

Owing the IRS is a civil matter and you have the advantage because your assets are out of the reach of the automated collection system.  Don’t give up that advantage and turn a civil matter into a criminal case where the IRS is trying to hang a pelt on its wall to scare others in to compliance.

The next item unique to expats is that not all offshore banks are created equal.  If your bank has a branch in the U.S., the IRS can issue a levy and reach your foreign account.

That’s right, if you are banking with HSBC in Columbia, the IRS can issue a levy to HSBC NY and empty your account in Columbia.  Obviously, this puts you at a disadvantage when it comes to setting up an installment agreement or an Offer in Compromise.

The solution is simple:  if you are an expat with an IRS tax debt, never use a bank with a branch in the United States.

You should also be aware that real estate and other assets in the U.K., France, and Canada are subject to seizure.  The IRS has the right to take your property in these countries and sell it at auction.  No expensive or time consuming court action is required.  Basically, the IRS has the same powers in these nations as it has at home.

Another area of concern for the expat with a tax debt is the Foreign Earned Income Exclusion.  I won’t go in to detail on it here, but, suffice it to say that the FEIE allows you to eliminate up to $99,200 in salary from your U.S. return in 2014, and slightly lesser amounts in prior years.  You will find a number of articles on this site on how to use the FEIE to reduce or eliminate your U.S. taxes if you are living abroad.

The expat tax debt collection issue with the FEIE is that, if you don’t file your U.S. returns, and you are audited, you can lose the FEIE.  This could be a financial disaster for the American abroad.

Let’s say you are living in Columbia, making $80,000 as a website designer for a local firm or through your own offshore corporation.  If you file your returns on time, you pay no U.S. tax because you qualify for the FEIE.  If you don’t file, and you get caught, the FEIE could be gone and you owe about 35% of 80,000, or $28,000.  Forget to file your returns for four years, and you could be looking at an expat tax debt of $112,000, all of which could have been avoided by filing on time.

What might happen if you don’t resolve your expat tax debt before the IRS catches up to you?  Of course, the same rules apply:  the IRS can attempt to levy your banks and income sources and seize any assets it can get its hands on.  That’s standard fare, but there are a few issues unique to the expat.

As I have said before, your failure to file can become a criminal case, which is very rare for someone living in the U.S.  It is also possible for offshore asset protection systems that are designed to keep money away from the IRS to become criminal cases.

Assuming you file on time, and don’t hide assets, then the IRS will have a tough time collecting from you… especially if your offshore bank doesn’t have a branch in the U.S.

One weapon in their arsenal is your U.S. passport.  The United States can revoke your U.S. passport for significant delinquent tax payments, and they have been known to use this against those who don’t cooperate in an installment agreement process, especially after the Service has gone to the trouble of tracking you down.  Without a passport, you will be forced to return to the U.S. to face the music.

Expats should also note that the IRS is opening branches “to serve you better” around the world.  The most recent grand openings have been in Panama, Australia, and Hong Kong… with more to come.  Agents from these offices can come in to your business, audit you at will, and have significant collection powers… and even more authority from intimidation.

If you are living abroad, and have an expat tax debt or other IRS issue, you should contact a firm experienced in these matters that understands the expat life and can negotiate with the Service on your behalf.  The majority of the risks of being offshore can be eliminated if you participate in the process and file the necessary forms.

For more information on expat tax debt and collection matters, please give us a call or send an email to info@premieroffshore.com.  As always, consultations are confidential.

Retire Abroad
Christian Reeves

2014 IRS Offshore Settlement Program

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If you have unreported offshore bank accounts or foreign assets, the IRS has one last best offer called the 2014 IRS Offshore Settlement Program.  Come forward and, if you are living offshore, pay no penalties.  If you are living in the U.S., pay only 5% for a fresh start.

This, the third installment of the IRS Offshore Voluntary Disclosure Initiative, is a great deal for some and bad news for others.  No matter where you stand on filing and paying taxes to the U.S., if you have a blue passport and an unreported offshore bank account, you need to understand your rights, risks, and costs of the 2014 IRS Offshore Settlement Program.

To give you a little background, the IRS has been going after offshore accounts hot and heavy since 2011.  They’ve attacked banks and U.S. citizens alike, getting banks to pay monster fines and putting 100 + citizens in jail.

These IRS indictments for offshore bank accounts have brought forward 45,000 taxpayers who have voluntarily paid $6.5 billion in taxes, interest and penalties.  As a result, the Criminal Investigation Division of the IRS has the highest return on dollars spent of any IRS division.

Banks have also kicked in a few billion to keep things moving.  UBS paid $780 million and gave up 4,400 clients in 2011.  Then, Credit Suisse paid $2.6 billion in May of 2014, and there are more settlements in the works for 2014 and 2015… including banks in Israel, Singapore, and Hong Kong.

2014 IRS Offshore Settlement Program Explained

The current Offshore Voluntary Disclosure Initiative is aimed at those with a good reason for having an offshore account, but who were unaware of their filing obligations.  Maybe they found out about their risks a few years ago, but, by then the costs of compliance were just too high.  Whatever your situation, you must have a good excuse as to why you have not filed to get in to this program.

The stated aim of the 2014 IRS Offshore Settlement Program is “…to get people to disclose their accounts, pay the tax they owe, and get right with the government.´ This is according to IRS Commissioner John Koskinen.

The IRS promises to go easy if you come forward and can prove to the satisfaction of the IRS that you did not intend to violate the law.  Note that the Service has the final say as to your intent.  If your story is not convincing, your penalty goes way up.  As you will have given them a roadmap to your income and assets in your initial filing, you don’t have the option of backing out if it doesn’t go your way.

Let’s get down to the numbers of the 2014 IRS Offshore Settlement Program.

Under the 2012 Offshore Voluntary Disclosure Initiative, if you were living and working abroad and owed $1,500 or less as a result of filing your U.S. tax returns, then you paid no penalties for failing to report your offshore bank account.  If you owed more than $1,500, then you paid 27.5% of the highest balance in your accounts and, in some cases, 27.5% of all foreign assets.

For an expat living in a high tax country, which is to say a country with a tax rate and system comparable to the United States, it was easy to qualify for the 2012 Offshore Voluntary Disclosure Initiative.  If you were living in a low tax country, or were operating through a tax efficient offshore company structure, but your salary exceeded the FEIE, the prior OVDI was quite expensive.

Under the 2014 IRS Offshore Settlement Program, it doesn’t matter how much you owe when you file your tax returns.  If you are living abroad, file and pay your last 3 years and show good cause for not reporting the accounts.  You will pay taxes for these three years and will pay no FBAR penalties.

If you are living in the United States and have an unreported offshore account, then you can qualify to pay a 5% penalty rather than the 27.5% fine.  Though, I must say that the hill to climb for a U.S. resident is much steeper than for an expat.  Like the expat, if the U.S. resident can sell a good story for his lack of compliance, it doesn’t matter how much you owe as a result of filing or amending your last three to six years of personal income tax returns.

If you (the expat or U.S. resident) can’t convince the IRS of your good intentions, you will be required to give up 27.5% of your foreign assets, which is what you would have had to do under the 2012 version of the Offshore Voluntary Disclosure Initiative.  However, if the IRS is already on your trail when you come forward, which is to say, the IRS is investigating the bank where you have your unreported accounts, then the penalty goes all the way up to 50% of your foreign assets.  Obviously, this creates some urgency, as the IRS is currently after a number of offshore banks.

Note that these penalties are assessed against the highest balance in your offshore bank account since it was opened.  If you had $1 million offshore for only one day, maybe because you were buying a foreign rental property, the 5%, 27.5%, and 50% penalties apply to the $1 million and not your average balance over the years.

I expect those living and working abroad for several years will have relatively easy time in the 2014 IRS Offshore Settlement Program.  This is especially true if you hold dual citizenship.  If you are in a low tax country, now is the time to come forward if you are willing to disclose all of your accounts and assets to the IRS in order to keep your U.S. passport and to get back in good standing with your government.

For those of you in the U.S., your road is sure to be more challenging.  What kind of story might succeed?  If you are a signor on a parent’s foreign bank account, and they live abroad, then I expect you might get away with the 5% penalty.  Also, if you had foreign assets before you moved to the U.S., and have been reporting your U.S. income, but not capital gains on these international accounts, I think you have a decent chance of success.

Also for those who are U.S. residents, I think the size of your payment when you file or amend your 1040 will be considered.  If you owe a few dollars, and it is minimal compared to your other taxes paid, then your chances of reaching the 5% deal are increased.  If your tax bill is increased by 90%, you better have an excellent story.

My last suggestion is that someone with a foreign rental property, who was not aware they should be reporting, might qualify for the discount.  Keeping in mind that you can take depreciation (all be it straight line and not accelerated) and ordinary and necessary expenses on the foreign rental, just as you do with a U.S. property, you will probably have a loss when you amend your return.  I believe such a case will qualify for the 2014 IRS Offshore Settlement Program’s 5% penalty.

I hope you have found this article helpful.  Please note that no 2014 IRS Offshore Settlement Program filings have been completed, so my suggestions above are just my opinion.

If you would like to determine your costs, risks, and probability of success in the 2014 IRS Offshore Settlement Program, the first step is to prepare or amend your tax returns.  For additional information, or for an assessment of your case, please call or email to info@premieroffshore.com.  All consultations are confidential.  We have helped many clients navigate the two previous IRS Offshore Voluntary Disclosure Initiatives and we can get you through this one with the best result possible based on your particular situation.

IRS Fees
Christian Reeves

IRS to Target Offshore Bank Accounts

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If you have unreported offshore bank accounts, the IRS is coming for you … again.  U.S. expats are about to find themselves under even more IRS scrutiny because of the 2014 Offshore Voluntary Disclosure Initiative, a new attack on offshore bank accounts.  The IRS is starved for cash and they are coming after expats with a vengeance.

Today I am writing on why the IRS is targeting expats and offshore bank accounts.  Tomorrow I will take a look at the recently released 2014 Offshore Voluntary Disclosure Initiative.  Today’s post tells you why.  Tomorrow is on how… and what you can do to protect your assets.

The IRS’s budget has been cut by $900 million since 2010, which means they are trying to do more with less.  Of these cuts, abut $500 million was the result of the “sequester.”  Most of the other cuts are being pushed by Republicans angry over the IRS targeting their cash machines.

Ever wonder what kind of Return on Investment the IRS generates?  The $500 million they lost from the sequester led to a drop in tax revenue of more than $2 billion.  This, according to IRS Commissioner John Koskinen.

That equates to an ROI of $4 to $1 – for every $1 spent auditing taxpayers, Uncle Sam gets $4.

In another example, IRS revenues from enforcement are down $4.3 billion from four years ago.  The IRS Commish said that this… “decline in audit revenue is attributable to a decline in the number of returns audited.”

While I don’t wish an audit on anyone, these numbers present problems for those who need to resolve their tax debt or otherwise contact the IRS.

Because of these IRS budget cuts, customer service has fallen apart.  For example, 15.4 million telephone calls from taxpayers went unanswered in 2013.  That’s over 15 million Americans who were trying to do the right thing and could not get their questions answered in a timely manner.

These budget cuts have also basically eliminated training for IRS personnel.  The National Taxpayer Advocate says that the average spent per employee on training dropped from $1,450 to less than $250 from 2009 through 2013.

You know full well how complex the IRS tax code is, especially for expats.  If the IRS employees have no idea what’s going on, how are they going to implement a program like the 2014 Offshore Voluntary Disclosure Initiative?  If they don’t understand the laws, how are they going to explain them to callers?

And these budget shortfalls place a much greater and more immediate burden on expats than average citizens.  First, your questions and filing requirements are much more complex than the average person who files Form 1040EZ and gets $100 back from their W-2.  You have to negotiate an ever changing landscape of laws, collection regimes, IRS policies, and code sections.  If you are lucky enough to get through to an IRS agent, your chances of finding one who understands your situation is slim.

Next, as the IRS collections group attempts to do more with less, they will go after high return taxpayers, which is how the IRS has viewed the expat and your offshore bank account for years… a cash cow.  You are a successful hard working bunch with average incomes several times higher than most Americans.  You also face a far more complex tax code with more opportunities to make an error.  For example, failure to file a FBAR alone can result in a penalty of $100,000 per year.

The bottom line is that the IRS’s ROI is 20 times higher when they attack expats than when they go after average, or even high net worth, U.S. residents.  The U.S. expat has a target painted on his back and it is just getting larger and brighter as the demand for cash increases.

Stay tuned for more on the recently released 2014 Offshore Voluntary Disclosure Initiative.  If you are living and working abroad, and you have unreported offshore bank accounts, you need to know your rights.

Offshore Tax Fraud
Christian Reeves

Anatomy of Offshore Tax Fraud

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If you are a U.S. citizen living, working or investing abroad, you need to understand the difference between Offshore Tax Fraud and International Tax Planning.  Offshore Tax Fraud is a crime while tax planning is the proper use of the U.S. tax code to minimize your taxes.  There are many benefits to going offshore, but the industry is filled with scammers and promoters.  Here, I will help you identify Offshore Tax Fraud in the hope of keeping the IRS away from your door.

Most conversations with offshore promoters and incorporation mills begin with: “Well, I’m not a U.S. attorney or CPA, but…” and then they offer U.S. tax advice.  My best advice to avoid Offshore Tax Fraud is to incorporate your international business, or create your offshore asset protection structure, through a U.S. tax expert.  You should be using an offshore jurisdiction that won’t tax you, so no need to deal with local tax issues.  It’s the United States that you need to be concerned with, so use a U.S. expert to structure your affairs.

  • The offshore jurisdiction is a tool in your international plan, not the primary concern.  You don’t need an expert in Nevis; you need one experienced in the U.S. Tax Code.

Here’s an example of an Offshore Tax Fraud scheme that was pitched to one of my clients recently:

Bob, who is living in California, was told to open a Panama Foundation and call it a Charitable Foundation.  Any money he put in to the Foundation could be deducted as a charitable contribution on his U.S. tax return.  Also, no tax would be due on capital gains in the Foundation because it is a “charitable” entity.

Even though the scammer had a fancy brochure and lots of paper backing up his sales pitch, it is obviously Offshore Tax Fraud.  Only charities licensed in the United States qualify for the charitable deduction… and that includes foreign operations.  While you are free to donate to any charity around the world, unless they have U.S. 501 (c)(3) status, the donation is not deductible.

This incorporation, in Panama and outside the reach of the IRS (or so they think), has devised a sales pitch that sounds reasonable, but which is Offshore Tax Fraud.  The Panama Foundation operates as a trust and is not a charity for U.S. tax purposes by any stretch of the imagination.  Anyone who falls for this pitch is guaranteed to have IRS troubles sooner rather than later.

Another path to Offshore Tax Fraud is any plan based on secrecy or privacy, especially if it includes keeping secrets from the IRS.  While increased privacy is a benefit of going offshore, it’s not the primary component of an international asset protection structure.

When I devise a plan for a client, I understand that it will be reported to the IRS, must be in tax compliance, and I assume that any major creditor will find out what steps we took and where the assets are located.  If the assets remain private, that’s great, but proper asset protection puts up barriers the creditor can’t breach.  It is not simply hiding assets at the risk of running afoul of the IRS.

Another road to Offshore Tax Fraud is any system that uses nominee directors.  While some structures require them, don’t get scammed into believing they shield you from paying U.S. taxes.  A structure is owned by a U.S. person, and thus taxable, if he or she owns or controls the assets.  Most asset protection is tax neutral.

  • There is no problem in using nominee directors to increase asset protection.  Issues arise when a sales person convinces you to pay extra for his nominees because they will save you big on your taxes.

Note that, when the IRS analyzes a tax plan, they focus on the economic substance of the transaction.  You should be able to reduce any complex offshore tax reduction plan to its basic elements and its economic components.  If your incorporation can’t explain the economics of the plan, it’s probably a form off Offshore Tax Fraud.

For example, what are known as 2% Plans have been popular with onshore and offshore promoters for years.  Basically, you sell 98% of your U.S. business to an offshore corporation for $1 or for a 10 year balloon rate.

You now get to send 98% of your profits out of the U.S. and off of your tax return.  Of course, this lacks economic substance and is Offshore Tax Fraud.

The 2% Plan fails for several reasons.  First, most of these structures use nominees, which the IRS ignores (looks through) and assigns ownership to the person controlling the structure.

Next, the offshore company has no operators, employees, or business outside of the U.S.  Therefore, it is ignored for U.S. tax purposes.  All business tax plans start with a legitimate office and employees outside of the U.S.

Finally, the sale of the business lacks economic substance because no one would agree to this transaction without the “tax benefit.”  A 10 year note, regardless of the interest rate, would never be used in an arms length transaction, so the IRS will not respect it here.

If your transaction lacks economic substance, it’s probably a form of Offshore Tax Fraud.  However, this only applies to transfers where you hope to gain a tax benefit.  Transfers to offshore trusts are not Offshore Tax Fraud because there is no tax benefit to the arrangement.  Offshore assets protection usually does not increase or decrease your U.S. taxes.  These structures are tax neutral… though they will require you to file additional forms to keep in compliance.  Any gains earned by your offshore trust are taxed in the U.S. as earned.

I’m often asked how the Googles and Apples of the world accrue billions of dollars offshore.  It’s because their transactions have economic substance.  By putting a legitimate sales office in a low tax jurisdiction, like Ireland, Google can defer U.S. tax on all income derived therefrom.

You, the U.S. business owner, can do the same thing.  If you hire a number of employees, and build an office or business in Panama, you can defer U.S. tax on income that results from this office.  The problem for most small business is that they can’t afford to hire 50 employees in Panama.  Many of us run our business with our spouse and three or four support staff.

For this reason, the owner of a small business must move out of the United States to receive these tax benefits and avoid claims of Offshore Tax Fraud.  If you move abroad, qualify for the Foreign Earned Income Exclusion, and operate a business through an offshore corporation in a tax free jurisdiction, you can achieve the same benefits as the big guys.

I’ll leave you with one more example of Offshore Tax Fraud.  Any plan that begins with the premise that the government’s authority to collect taxes from its citizens, including those living and working abroad, is limited or invalid is a scam.  So long as you hold a U.S. passport the U.S. IRS claims dominion over you.

These “plans” often claim that the IRS’s authority to enforce the tax code was never ratified by Congress.  Others say income from work or labor is not taxable for one reason or another.  Still others claim you can “pay” your taxes with a note or promise to pay, usually referred to as a Bill of Exchange.  If anyone approaches you with such a plan, run the other way.  Having worked as a tax attorney for a decade, I’ve seen every iteration of this form of Offshore Tax Fraud and I tell you it won’t work.  In fact, you will be labeled a tax protester and the IRS will audit and harass you to the ends of the earth.

If you’re in the mood to read up on these scams, google “Bills of Exchange,” or “Tax Protester.”  There are several famous cases in this area, such as Mr. Snipes, and too many protesters sitting in jail to count.

Feel free to give us a call, or send an email to info@premieroffshore.com, with any questions.  We will be happy to work with you to structure your international business or protect your assets.  All consultations are confidential.

Offshore IRA Fees
Christian Reeves

Offshore IRA Fees are Low, Guaranteed

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I guarantee that Offshore IRA Fees are lower than what you’re paying in the U.S. on a large managed account.  Put more succinctly, the cost to manage your large IRA offshore should be less than Fidelity’s “No Fee” IRA or 401(k), less than Prudential’s no and low cost options, and less than any managed account you can name.  The larger your IRA, the more you save.

It’s simple:  Offshore IRA Fees are fixed.  If you manage your own offshore IRA account, you should never need to pay:

  • Account Fees
  • Brokerage Commissions
  • Management Fees
  • Investment Commissions
  • Hidden Fees, or
  • Be locked in to only those investments your provider approves.

When you sign up for the “no fee” IRA with most providers, you still get hit with all types of commissions and hidden fees.  Even worse, you are only allowed to invest in those products offered by your provider.

That provider is probably charging you a fee to make the investment and making a lot more on the back-end on commissions from the fund you’re invested in.  Plus, they often add on low balance fees, short term trading fees and account closing fees.

The typical fee structure on many investment funds is 2/20.  Your provider earns 2% per year on money in his fund, plus 20% on the appreciation of the assets in the fund.  If you’re lucky, there is a hurdle rate so they only earn this 20% on earnings over LIBOR, U.S. inflation, or some other benchmark like U.S. Treasuries.  If they place you in someone else’s fund, they might earn a 50% commission, so 1%/10%.  Obviously, they direct you to their branded products.

So, for a “free” IRA, you could be paying a 1% fee to manage your money, brokerage and trading fees on each transaction, 2% on your money placed in their fund, plus they are earning 20% for the use of your money on the back-end.

No wonder IRAs have such dismal returns.  By comparison, Offshore IRA Fees are minimal.  If you take your IRA offshore with us, costs should be as follows:

  • $2,995 to form the offshore LLC, open the offshore bank account, and draft the operating agreement.
  • The custodian we use most often charges $250 to open the account and about $550 per year.
  • Second year fees on your offshore IRA LLC should be around $650.

Note:  Estimates are as of June 15, 2014 and subject to change without notice.  I have not considered bank or wire fees in either the onshore or offshore examples above, but you can assume they are higher offshore.  If you have multiple IRAs, fees from your custodian may be higher.  Your formation fee remains the same ($2,995) because you may place multiple accounts in to a single offshore IRA LLC.

These fees don’t go up as our IRA gets larger.  Your Offshore IRA Fees are fixed, regardless of the size of your account.

You can take control of your retirement account, fix your Offshore IRA Fees at about $1,200 per year (year 2), and eliminate all commissions and hidden charges.

For information on how to take our IRA offshore and control your Offshore IRA Fees, please call or email us at info@premieroffshore.com for a confidential consultation.  We are experts in the offshore IRA and will be happy to work with you.