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Bankruptcy & Taxes

01/04/2013/0 Comments/in /by admin

Can I Dump My Tax Debt in Bankruptcy?

Bankruptcy and Tax Debts

By Christian Reeves, Tax Attorney

Personal income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. However, special rules apply to tax debts that make it difficult, if not impossible, for most people to dump their tax debt.

Of course the Federal Government put in special rules to ensure they collect your tax debt ahead of any other type of creditor…did you think it could be otherwise?

The bottom line is this: The IRS usually gets to come after you for two to three years before you can discharge your tax debt in bankruptcy. This means you must set up an Installment Agreement, file an Offer in Compromise, or come to some other agreement that keeps the IRS out of your bank account and paycheck until you are eligible for bankruptcy.

Here are the rules. You must meet all four to qualify for bankruptcy.
1. The due date of the return must be from at least three years before you file for bankruptcy.

The tax debt must be related to a tax return that was due at least three years before you file for bankruptcy. The due date includes any extensions.
For example, your 2008 personal income tax return is due on April 15, 2009. If you did not file an extension, you can usually bankrupt those taxes on April 16, 2012.
2. The return was filed at least two years before you file for bankruptcy.
The tax debt must be related to a tax return that was filed at least two years before you file for bankruptcy. This time is measured from the date you actually filed the return.
So, if you file your delinquent 2002 and 2003 tax returns on October 20, 2009, you can usually bankrupt these taxes on October 21, 2011. Your 2003 return was originally due on April 15, 2004, it has been more than three years since its due date, and you filed your returns at least 24 months before declaring bankruptcy.
3. Your tax assessment has to be at least 240 days old.
Your tax debt must have been assessed for at least 240 days before you file for bankruptcy.
A tax assessment generally refers to two types of tax cases:
1. After an IRS audit runs its course and all of your rights to appeal have been exhausted, then the balance due becomes final. This date is the assessment date.
For example, if your 2005 return is audited and the resulting balance due becomes final on March 30, 2007, you must wait 240 days from this date before bankrupting these taxes.
2. When you don’t file your tax return on time and the IRS computers have data indicating that you might owe money to the IRS, the computers will prepare a “substitute for return” on your behalf. After sending a number of notices to your last known address, the amount due on this substitute return becomes assessed and payable.
a. It is important to note that these substitute returns use the highest tax rate, assume you have no deductions, and are never calculated in your favor. If you owe money to the IRS from this type of assessment, you should file accurate returns before dealing with collections or considering bankruptcy.
b. You must file all delinquent tax returns, including the years involving substitute returns, before declaring bankruptcy.
4. The return is not fraudulent and you are not guilty of tax evasion.
The tax return filed cannot have been fraudulent or frivolous and you can’t be guilty of tax evasion. For the sake of this article, we will assume you filed a reasonable tax return and have not been convicted of tax evasion.

Some Tax Debts Aren’t Dischargeable

Personal income taxes are generally eligible to be discharged in bankruptcy. Personal taxes that are the result of payroll tax or sales tax penalties, known as civil penalties, cannot be discharged.

NOTE: All types of tax debt, including civil penalties, may qualify to be eliminated with an IRS Offer in Compromise, paid off over time with an Installment Agreement, or resolved through other IRS programs.

Bankruptcy to Delay

Bankruptcy will stop all IRS collections and put Installment Agreements on hold until your case is completed. Your bankruptcy case may take weeks, months, or even years, and thus provide you time to get your affairs in order.

However, as stated above, interest and penalties continue to accrue. Also, your collection statute is on hold while you are in bankruptcy. If you are in bankruptcy for 24 months, the collection period is extended by the same period of time.

Collection statute: The IRS typically has 10 years to collect from you once a tax return is filed or tax is assessed. Any time the IRS is prohibited by law from collecting, the collection statute is on hold.

Because there are many remedies available to you within IRS programs, bankruptcy should not be used solely to delay collections. Of course, you may have other debts you wish to discharge, and delay may be an added benefit, but it should not be a primary factor in your decision.

The Effect of These Rules

As a result of these rules, most clients who contact us do not qualify for bankruptcy. Most people can only hide from the IRS for a short time before their bank accounts are drained or their paychecks garnished.

Of those who file bankruptcy to eliminate other creditors, most emerge with a larger tax debt and a more aggressive IRS, because interest and penalties continue to accrue. In most cases we see, bankruptcy leaves only the IRS standing…which is the objective of the rules.

Those of you who are not eligible for bankruptcy must face the tax debt head-on and without delay.

Those who file bankruptcy, and are unable to discharge their tax debt, must keep close tabs on their status and contact the IRS with a complete package of financial information once their bankruptcy has been discharged.

Being proactive and contacting the IRS before they knock on your door is the best and only way to prevent a bank levy or wage garnishment from wiping you out.

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Premier Tax & Corporate, Inc. does not offer legal advice and does not provide document preparation or filing for bankruptcy petitions. If you are considering bankruptcy, you should consult an attorney in your area.

The Spoils of War – Big Time Tax Increases for 2013

01/02/2013/in Taxation/by Christian Reeves

The mêlée at the edge of the fiscal cliff is over and the Democrats have scored a decisive victory.

The battle lines were simple: Democrats wanted to raise taxes while Republicans wanted to cut spending. When the fighting was over, tax revenues were up by $620 billion against only $15 billion in spending cuts…a massacre if there ever was one.

And you can be sure there are hidden landmines and random scud missiles on the way – in the form of concessions on unemployment insurance, Social Security, FICA, et al and the inheritance tax. When taken in total, revenues may be increased by as much as $800 billion.

As it stands today, the fiscal cliff deal resulted in $1 dollar of spending cuts for every $41 in tax increases…possibly the most one sided victory since the Battle of Little Bighorn in 1876. By comparison, when President Ronald Regan increased taxes, he secured $3 in spending cuts for every $1 in tax hikes. When George H. Bush was at the helm, he negotiated $2 in spending cuts for every $1 in tax hikes.

Most of the casualties in this battle royale are individuals with incomes over $400,000 and couples making over $450,000, but there will be significant pain and suffering for those with incomes as low as $250,000.

I also note that any hope of a tax system which treats married couples and single persons with some level of equality was blown to hell. Two single persons could earn $800,000 combined before being smashed by the tax hikes, compared to only $450,000 for a married couple.

Here are the casualties by the numbers:

Tax rates will shoot up to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000.
Tax rates on dividends and capital gains would also rise, to 20 percent from 15 percent, on income over $400,000 for single people and $450,000 for couples.
Personal exemptions and deductions will be phased out, beginning at single people earning $250,000 and $300,000 for couples.
The estate tax will increase, but less than Democrats had wanted. The value of estates over $5 million will be taxed at 40 percent, up from 35 percent. Democrats had wanted a 45 percent rate on inheritances over $3.5 million.

Under the deal, these new rates on income, investment and inheritances are permanent.

Among all of the explosions and cries of anguish, there was good news for the American abroad: The Foreign Earned Income Exclusion survived, and even got a little bump up for the cost of living. If you are living and working abroad, you can earn $97,600 in 2013, up from $95,100 in 2012.

Also, the self-employed Expat can avoid the Unemployment, Social Security and FICA tax increases (also called self-employment taxes) by incorporating offshore and qualifying for the FEIE. By operating your business through an offshore corporation, you might eliminate these taxes completely, a savings of about 15%.

But be careful: the 2013 tax increases and phase-outs will apply to any ordinary income over $97,600 and all passive / investment income.

Because the tax brackets ignore the FEIE, and Expats are taxed on their worldwide capital gains (now at 20% rather than 15%), many higher earning Americans abroad will be shocked by their 2013 tax bill. For additional information on these issues, please see: http://premieroffshore.com/offshore-tax-international-tax/

For the self-employed, there are a number of planning opportunities. For example, you can retain earnings over the FEIE amount in your offshore corporation or utilize a Solo 401-K to shelter income in a retirement plan.

For the investor, you can make tax advantaged investments offshore through your IRA and thumb your nose at the 20% short term capital gains tax. In fact, there are a number of tax advantages for the sophisticated offshore IRA investor – just ask Mitt Romney.

As tax rates go up, so does the need for competent tax and business advice. I strongly recommend you contact your international advisor as early as possible this year to develop a plan of action.

And remember, so long as you hold a U.S. passport, you must file Federal returns and abide by these laws. Regardless of which country you call home, make sure your global tax plan is approved by a U.S. tax expert.

For additional information on this article, or for a free international tax consultation, please contact us at info@premieroffshore.com or call (619) 483-1708.

Foreign Earned Income Exclusion 2013 Amount

01/01/2013/0 Comments/in Taxation/by admin

The Foreign Earned Income Exclusion 2013 amount got a little bump up for inflation and managed to avoid the financial cliff. The Foreign Earned Income Exclusion 2013 amount is $97,600, up from $95,100 in 2012.

As an American citizen living overseas, you are subject to the same U.S. tax laws as a United States resident. One of the only personal tax benefits you get for living abroad is the Foreign Earned Income Exclusion. If you are out of the U.S. for 330 days, or are a resident of another country, you can exclude up to $97,600 of earned income from your U.S. personal return using the Foreign Earned Income Exclusion 2013 amount via Form 2555.

Note: My website has a number of resources explaining the Foreign Earned Income Exclusion 2013 amount and use. Please click here for an in-depth article on international taxation for Americans.

Earned income is active income and is defined as wages, salaries, commissions and professional fees. It does not include investment, rental, or other types of passive income.

If you earn more than the Foreign Earned Income Exclusion 2013 amount, you will pay Federal tax on the excess. However, if you are operating a business, or are self-employed, you may be able to eliminate this tax by using an offshore corporation and retaining earnings in the entity over and above the Foreign Earned Income Exclusion 2013 amount.

Note: Yes, the ability to retain earnings offshore also survived the fiscal cliff and will be the topic of a future article. For additional information, check out this article from Bloomberg.

Foreign Earned Income Exclusion 2013 and Prior

Historically, the Foreign Earned Income Exclusion has increased with inflation, with the exception of 2002 through 2005, when it was stuck at $80,000.

Tax year 2013: $97,600
Tax year 2012: $95,100
Tax year 2011: $92,900
Tax year 2010: $91,500
Tax year 2009: $91,400
Tax year 2008: $87,600
Tax year 2007: $85,700
Tax year 2006: $82,400
Tax years 2002-2005: $80,000
Tax year 2001: $78,000
Tax year 2000: $76,000
Tax year 1999: $74,000
Tax year 1998: $72,000

Sources: IR-2012-78, Oct. 18, 2012 for the 2013 amount, Revenue Procedure 2011-52 (PDF) for the 2012 amount, Revenue Procedure 2010-40 (PDF) for the 2011 amount, Revenue Procedure 2009-50 (PDF) for the 2010 amount, Revenue Procedure 2008-66 (PDF) for the 2009 amount, Revenue Procedure 2007-66 (PDF) for 2008 amount, Revenue Procedure 2006-53 (PDF) for 2007 amount, Revenue Procedure 2006-51 (PDF) for 2006 amount, Internal Revenue Code Section 911 for the tax law concerning the foreign earned income exclusion.

Remember that the Foreign Earned Income Exclusion is a “use it or lose it” tax break. If you are living abroad, do not file your returns, and are audited, you may lose the Foreign Earned Income exclusion. This means that 100% of your worldwide income will be taxable in the US.

If you are delinquent on your U.S. tax filing obligations, catch up before the IRS gets a hold of you. For information on our Expat tax filing services, please call us at (619) 483-1708 or email info@premieroffshore.com for a confidential consultation.

For the current FEIE amount, see Foreign Earned Income Exclusion 2020

Form Error

12/03/2012/in /by admin

How embarrassing…

We apologize. There was an error in the form and we did not receive your information. Please try back later or send an email to info@premieroffshore.com and we will get you subscribed and send your free book ASAP.

Thank you,

Premier Offshore Admin

Welcome to Premier Offshore Investor

12/03/2012/in /by Christian Reeves

Dear New Reader,

Thank you for signing up for my e-letter. Every Monday, Wednesday and Friday I will send you helpful research, information, and the occasional commentary on living, working and doing business offshore.

In a few minutes, you will receive an email with additional information and links to our various Expat resources. Please watch out for that message and check your spam or junk inbox if it does not arrive.

If you would like to get a head start on all things Expat, you might checkout my 180 page International Tax and Business Guide. It’s free to read on Amazon Kindle Unlimited. Click here for more.

I look forward to our dialog in the coming weeks. If you have any trouble receiving the email, or have any questions, please contact me directly at christian@premieroffshore.com.

Best Regards,

Christian Reeves
PremierOffshore.com

IRS Voluntary Disclosure Program Gives Big Breaks to ExPats

11/29/2012/in Taxation/by Christian Reeves

IRS Voluntary Disclosure Program is great news for some Expats and dual-nationals

As an ExPat American, you know that you are required to file a U.S. tax return each year and report your foreign bank accounts if you have more than $10,000 offshore. If you have failed to file these forms, and want to get back in to the good graces of the IRS, the IRS Voluntary Disclosure Program may be for you.

Unless you have been living under a rock in Bangladesh, you also know that the IRS has been pushing hard to force disclosure, compliance and payment. The drive for increased revenues started in 2003 when the IRS began investigating offshore credit cards. At that time, it was about compliance. The government had not yet figured out that putting people in jail for tax crimes would generate a lot of news, thus cause many more thousands to come forward, and bring in a truckload of money…and promotions.

In 2008 the U.S. government began its attack on UBS in Switzerland, eventually forcing the Swiss to disclose 4,450 names of U.S. citizens with unreported accounts. The U.S. followed this up by prosecuting a few people in each State or region of the country to ensure maximum news coverage and created the voluntary disclosure program to capitalize on their campaign.

So far, there have been three IRS Voluntary Disclosure Programs allowing people to come forward and voluntarily report their offshore bank accounts. As of June 26, 2012, the IRS brought in over $5 billion in new taxes, interest and penalties.

The third, and current IRS Voluntary Disclosure Program came into effect on September 1, 2012 and has several benefits for what it considers “low-risk” persons. These are U.S. citizens, including dual-citizens, who currently reside overseas, who owe little or no U.S. taxes. The objective is to convince these people to report the value and locations of their money and assets in exchange for not being hit with excessive civil penalties.

These low-risk persons will be able to file three years of delinquent U.S. tax returns (including required information reporting forms) and six years of FBARs without the imposition of program penalties. Whether a taxpayer is “low-risk” will depend on a number of factors, but will primarily require that the tax due is less than US$1,500 for each of the covered years, that the person was living and working outside of the U.S. during these years, and that the person did not take steps to conceal their income from the U.S.

It should be noted that this procedure will provide no protection from the risk of criminal prosecution. The IRS website indicates the following regarding criminal prosecution: “The IRS Voluntary Disclosure Program has a longstanding practice of IRS Criminal Investigation whereby CI takes timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chance of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.”

Because the tax due amount within the IRS Voluntary Disclosure Program takes the Foreign Earned Income Exclusion and Foreign Tax Credit in to consideration, most Expats and foreign residents will qualify as low risk. For example, anyone who is employed in a high tax country (a country with a tax rate equal to or greater than the U.S.), should be in the clear, as will most people earning less than $80,000 to $95,000 per year who are living in a low tax country. Those at risk are entrepreneurs living in low tax countries, high net worth individuals with significant untaxed capital gains or passive income, and just about any self-employed person who was not operating through a foreign corporation and is thus subject to self-employment tax.

There are two groups of ExPats that are excluded from this IRS Voluntary Disclosure Program: 1) if your account is at a bank that is currently under investigation by the U.S., you may not be eligible, and 2) if you attempt to fight the release of your banking information from your foreign bank, you will not be eligible for this program. For example, if the U.S. issues a summons to Bank ABC in Lichtenstein requesting all U.S. accounts, and you fight the request, you are disqualified from this program.

In addition, the IRS may announce that certain groups of taxpayers that have or had accounts at specific offshore banks will be ineligible to participate in the IRS Voluntary Disclosure Program due to pending US government actions in connection with those specific institutions. Details regarding eligibility or ineligibility of specific taxpayer groups connected to such institutions will be posted to the IRS website.

The IRS says: “US persons with undeclared bank accounts are reminded that the 2012 IRS Voluntary Disclosure Program gives taxpayers with unreported foreign bank accounts a chance to come clean while mitigating the risk of criminal prosecution, and that they should consider remedying any past non-compliance with their US tax and information reporting obligations while there is still an opportunity to do so.”

If you are a U.S. citizen who has been living and working abroad, and are willing to disclose your accounts and assets, now is the best time to evaluate your rights.
I recommend the following three step plan of action:

discuss your situation with a qualified tax attorney to evaluate your risks of criminal prosecution,
have your attorney prepare U.S. tax returns to determine the amount of taxes due, and
if you qualify as a low-risk citizen, join the voluntary disclosure program program as soon as possible and before your bank comes under attack or you are disqualified for another reason.

If you do not qualify as a low-risk taxpayer, you may still participate in the current IRS Voluntary Disclosure Program. However, you will be subject to substantial taxes and program penalties, which are more severe than those levied by previous initiatives.

In addition to the standard tax, interest and penalties associated with your delinquent returns, the following penalties will be assessed, and must be paid or you will be disqualified from the program:

20% accuracy-related penalties on the full amount of your offshore-related underpayments of tax for all years;
Pay failure to file penalties, which are up to 25% of the unpaid tax, if applicable;
Pay failure to pay penalties, which are up to 25% of the unpaid tax, if applicable;
Pay, in lieu of all other penalties that may apply to your undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a penalty equal to 27.5% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;

Note that this penalty includes the value of all foreign assets, including real estate.
As you can see, the penalties are very severe if you do not qualify as a low-risk taxpayer. However, getting back in to the system and removing the risk of criminal prosecution will motivate many to come forward, pay up, and sleep better at night knowing that Uncle Sam will not come knocking…not yet, anyway.

If you have unreported accounts or questions about your U.S. Expat taxes, please contact me for for a free and confidential consultation regarding the IRS Voluntary Disclosure Program. I can be reached at (619) 483-1708, or info@premieroffshore.com.

The Real Costs of Your 401K Revealed

11/28/2012/0 Comments/in Offshore IRA/by Christian Reeves

401(k) Fees Revealed – Get Ready for a Shock!

If you have a 401(k) account with a U.S. broker, you are about to get the shock of your life. When you receive your next quarterly statement, probably between Sept. 30 and Nov. 15, do not open it without taking precautions!

I suggest you take the envelope over to the sofa and sit down, remove any sharp objects, or anything which could be thrown against the wall in anger, take a deep breath, and then open it. You are sure to find a whole host of fees and expenses that you have been paying all along and had no idea. You will now learn exactly why you have lost money, or why your returns were less than stellar, and how much of that was due to hidden fees charged by the broker who was working so diligently on your behalf.

Why the new disclosures? For the first time since Congress laid the groundwork enabling these plans in 1974, all of your fees must be disclosed. Previously, these statements showed investment returns after fees were deducted, but did not show the fees themselves — probably leading you to believe that your investments weren’t returning as much as they actually were.

Now, because of new government regulations, you’ll be able to see how your investments have done before fees are deducted because actual returns and costs will be displayed in separate columns. You will have a clear picture of how your investments did and how much was taken out for management, in transaction fees, etc.

Ok, you just found out that you have been grabbing your ankles for a very long time. What can you do with this information? If you have a 401(k) with your current employer, you may be out of luck. You can storm in to your HR department and demand that they find a firm with more reasonable fees. Enough of the local broker who buys dinner and drinks for HR guy! If they refuse, you have little recourse.

If you have a 401(k), or any other type of retirement account, with a former employer you can take over control, eliminate 90% of the fees, and make your own investment choices by moving it in to a Checkbook LLC. You simply form a U.S. LLC or international LLC and transfer the retirement account from your current provider in to that entity.

Note that the law requires your retirement account have a licensed agent involved. Thus, there will be a U.S. administrator and minor fees with the LLC. However, the administrator will not be involved in your investment decisions and he will not take a piece each time you make a trade. His primary role in the Checkbook LLC is to handle annual reporting to the IRS. You tell him how your investments did at the end of the year and he reports to the government.

You have two choices with the Checkbook LLC. You can use a U.S. LLC and make investments in the United States, or you can use an international LLC and make investments outside of the U.S. of A. With the international LLC, you can hold your funds in any bank or brokerage around the world, in any currency or currencies, and make any investment you see fit.

For example, the international LLC can invest in real estate in Ecuador, have a bank account in Belize, trade currency through a broker in New Zealand, and own gold and other precious metals in a vault in Switzerland. The investment options are unlimited, and the decisions are yours. You will not be required to get the permission of the administrator…you simply write the check (hence the name, Checkbook LLC) or send the wire to complete the transaction.

Of course, there are some basic rules. For example, you must manage the LLC for the benefit of the retirement account.

In other words, you must handle it as an investment account, and not take any money for personal use. You can purchase real estate as an investment, but you cannot live in the property…you must rent it out to an unrelated person at fair market rates.

If you would like checkbook control over your retirement accounts, please contact Premier Offshore Investor at (619) 483-1708, or email info@premieroffshore.com. We will send you a detailed presentation with all the rules, answer any questions, and guide you through the process.

Offshore Banking is Safe!

11/27/2012/0 Comments/in My Thoughts, Offshore Banking/by Christian Reeves

When potential clients call me about an offshore company or trust with an international bank account, their number one concern is security.
Is there money safe in an international bank that they have never heard of?

The simple answer is YES, your money is safe…often significantly safer than in your local United States bank.
The real question should be, is your money safe in a U.S. bank?

According to the August issue of Global Finance, only 5 U.S. banks are in the top 50 for safety. Of these, the first, Bank of New York Mellon, doesn’t appear until #29, followed by CoBank ACB at #32, U.S. Bankcorp at #37, Northern Trust Corp at #39, and Wells Fargo at #48.

The United States is not even the safest jurisdiction in North America. Canada, a frozen tundra of a nation, that thinks hockey is a sport, that can’t pronounce the word ‘about,’ and has about 10% of the population of the U.S., has seven banks in the top 50, compared to our five.

To quote Global Finance, “Canadian banks are the best performing in North America with seven banks in the top 50 compared to five from United States. Banks from Singapore are the strongest in Asia and from Chile in Latin America. Credit ratings and rankings of most European banks have suffered except for those at the very top of the list which have explicit guarantees from AAA rated governments.”

And things seem to be getting worse in the U.S. banking sector. According to the FDIC website, during 2005, 2006 and 2007, only three US banks failed. However during 2008, 2009, 2010 and 2011 a staggering 414 US banks failed. From 2008 through 2011, the FDIC fund lost $88 billion.

Year to date 2012, 43 U.S. banks have failed. The most recent was Truman Bank, based in St. Louis. This local bank had 4 branches, $282.3 million in assets, and $245.7 million in deposits as of June 30 and will cost the FDIC fund $34 million. The FDIC expects to lose only $12 billion in 2012 through 2016…this is what the U.S. banking sector calls improvement.

After safety, potential clients are concerned with access and convenience. Of course, it might be difficult to regularly “visit” your money if it is in Luxembourg, but is that really necessary? Banking convenience has been globally equalized through the Internet and online banking. Nowadays no matter where your bank is, and no matter where you happen to be, you have access to your account information, money transfers and electronic deposits. It really doesn’t matter what your bank’s physical address is anymore, you can transact business through old school telephones, computers, tablets and smart phone apps.

In fact, you can often open a bank account through an eligible introducer without traveling to the bank. About 95% of the applications I submit are done through a courier service, with only certain private banking institutions requiring a personal visit.

There has never been a better time to put your money in one of the safest banks in the world and plant your most important international financial flag. Because of various U.S. laws coming in to effect throughout 2013, it is strongly recommended you have your international finances squared way before the end of 2012.

For additional information on international corporations, asset protection trusts, and international banking, you can contact us at (619) 483-1708 or info@premieroffshore.com.

For more on the world’s safest banks, CLICK HERE to go to the Global Finance website.

The IRS has no Problem Using Weapons of Mass Destruction

11/26/2012/in My Thoughts, Taxation/by Christian Reeves

IRS Attacks Forcing High Net Worth Americans out of the Country

The number of American expatriations is at a record high as tens of thousands of Americans a year are moving abroad in search of better lives. A root cause is how the U.S. government is treating its citizens these days.

At least 1,788 Americans officially threw away their U.S. citizenship in 2011, exceeding the totals from 2007, 2008, and 2009 combined. The Internal Revenue Service has been keeping a tally of U.S. citizens driven to renouncing that title since only 1998, but last year’s number has officially raised the bar when it comes to calling America quits.

Out of the 34 countries that belong to the Organization for Economic Cooperation and Development, the United States is the only nation that taxes its citizens no matter where they reside on Earth. As long as a person maintains citizen status, they are expected to send the United States government pennies on every dollar earned no matter where they live. The good old U.S. of A is also one of the only countries in the world that locks up its citizens in boxes for failing to pay up.

As the U.S. government works ever-more-aggressively to find ways to fund the deficit and as their worldwide bullying continues to create a backlash for us Americans trying to diversify offshore, more and more of us Americans who understand the importance of diversifying offshore are considering the idea of saying thanks, but, no, thanks, Uncle Sam. Here’s your passport back.

Just about every call I get now related to expatriation is from someone either battling the IRS or afraid of winding up in a clash with the Government.

Why are so many citizens concerned? I believe it is because the tone of the Internal Revenue Service has changed dramatically in the last five years.

Historically, if an average American failed to report his income accurately and completely it was a civil or a financial issue…he or she had to pay the taxes and penalties. Increasingly, the IRS is turning those sections of the tax code enacted to go after drug dealers and mafia kingpins (think Al Capone) on ordinary citizens, all in the name of increasing revenues.

These weapons of mass destruction (which, in this case, the U.S. government has no trouble finding) put regular people in jail for years for failing to file a form or to report income. They are being used not only to go after multi-millionaires and billionaires with huge accounts offshore, but everyday hard-working Americans, as well.

Here are three examples from my clients. There are hundreds of similar cases being argued throughout the United States right now.

Example #1 – Offshore Account

I know a single father of three who makes about US$80,000 a year as a self-employed consultant. Eight years ago, he moved some money offshore, to diversify and for asset protection. He never filed the necessary IRS forms, and he failed to report the account on his tax return.

Unfortunately for him, the account was at UBS Switzerland. He was reported to the IRS, which has decided to prosecute him.

Here is the rub: He did not have any unreported or untaxed income…which is to say, the account did not earn any interest, and the guy would not have had to pay any additional U.S. tax had he reported it.

That’s irrelevant now. In settlement negotiations, the man is facing up to one year in jail and a fine of US$540,000.
He has little money left and will never be able to pay the fine.
What is the point of the prosecution? The IRS gets to issue a press release showing a conviction in this city. This press release will forget to mention that there is no tax loss in the case, but it may induce many others to come forward…thereby increasing revenues on the back of an everyday citizen who made a mistake.

Example #2 – Cash Transactions

A retired U.S. citizen I know, living in California, age 60, is concerned about a major devaluation of the U.S. dollar. He decided a while ago that he wanted to purchase gold. He owns a condo with some equity and has a few hundred thousand dollars in retirement money.

As a regular guy, he can´t afford to buy large amounts of gold bullion, so he purchased gold coins from a local dealer. He paid cash for these coins so the dealer would not have to wait for a check to clear before handing over the merchandise. He has never sold any of his coins, thus there is no tax issue.

What did he do wrong? He took cash out of his account once or twice a week, always less than US $10,000 at a time, to make the gold purchases. To the IRS, this can qualify as “Structuring,” which is a crime.

The man’s bank sent two suspicious transaction reports to the IRS and closed his account. He had been a client of this bank for more than 30 years, yet the bank made no effort to warn him in advance of the reports they made to the IRS or to offer any assistance. They just turned him in.

As a result, the man is looking at a fine of up to US$100,000 and possible criminal charges that could incarcerate him for up to five years. Add to this a minimum of US$100,000 in potential legal fees, and the reality for this guy is that he and his family could be wiped out. Again, this is all the result of an innocent mistake.
Example #3 – Dual Citizen

Another client is a 55-year-old engineer who has been working at the same job for 20 years. He is a dual citizen of the United States and the United Kingdom. When he moved to the States, he rented out his U.K. home. Ever since, he has deposited this rental income in a U.K. account.

The man has filed tax returns in the U.K. reporting the rental property, but he did not report it, or the U.K. account, to the IRS. Had he reported the property and the related rental income all along, it would not have made any tax difference in the United States.
In fact, reporting the rental could have reduced his U.S. tax, thanks to the depreciation he could have claimed.

In 2009, this man learned of the requirement to file an FBAR form and entered the IRS Voluntary Disclosure Program. As a result, this story has a happier ending than the others. This guy will not face criminal charges.
He will, though, pay a fine of approximately US$22,000.

Cases like these and the hundreds of others currently being argued have changed the way that tax attorneys deal with clients. While we once would say, ‘Come clean, be honest, and let’s get through this,’ now we advise, ‘Be afraid…be very afraid.’

It is this culture of fear that is pushing many Americans to look around the world for places where they might live better, freer, and less fearfully.

I’ll note that these changes are not the result of one political party or another. They represent a permanent change in perspective by the U.S. government in general, in how both parties view their citizens. Changes to the tax laws, and in the ways the laws are interpreted, began under George Bush II with the Patriot Act and continue under Barack Obama with the Bank Secrecy Act and the HIRE Act.

In the face of a troubled U.S. economy and out-of-control spending, the U.S. government desperately needs to expand its tax revenues, and the IRS has decided that it can raise more money with fear and violence than with honey.

It’s a situation that qualifies as dire, and sensible Americans are looking to escape it as quickly as they can.

Expats – Convert to a Roth ASAP!

11/25/2012/0 Comments/in Offshore IRA, Taxation/by Christian Reeves

If you qualify for the Foreign Earned Income Exclusion and have a traditional IRA, now is the time to convert that relic to a Roth. Doing so may save you a fortune in taxes, especially if completed in 2012.

The Foreign Earned Income Exclusion (FEIE) allows you, the intrepid Expat, to eliminate up to $95,100 of wage or ordinary income from your 2012 tax return. If you and your spouse are both operating a business, or are wage earners, you might exclude up to $190,200 combined.

To qualify, you must be living and working outside of the U.S. This means you are 1) employed by a corporation (it does not matter if you own that company) and 2) are a resident of a foreign country or are outside of the U.S. for 330 out of any 365 day period.

So, the FEIE takes care of your ordinary income. However, we Expat Americans are still required to pay U.S. tax on our investment and passive income, no matter the source. That means all of the benefits of a retirement account apply and the tax rate and rules for investment income are the same for Expats and residents.

For an Expat, a Roth IRA has numerous tax planning advantages over a traditional IRA. This is because you pay taxes on the front end while you are maximizing the FEIE and you don’t pay taxes when you withdraw funds in retirement. Also, there are no required minimum distributions when you hit retirement age.

A traditional IRA allows you to deduct contributions on your tax return and any earnings grow tax-deferred until you retire. But these deductions may be of little or no value to the Expat whose income is less than $95,000 or $190,000 joint. Also, because of significant capital gains and other passive income, an Expat’s tax rate may be higher in retirement than while working under the FEIE. In that case, converting to a Roth after retirement can be costly.

Converting to a Roth or contributing to a Roth while abroad will allow you to make the most of your itemized deductions. For example, all Americans may deduct mortgage interest (on up to two homes), property tax, medical, etc., or take the standard deduction of $5,800 single and $11,600 joint (tax year 2011). It does not matter if you maintain a home in the U.S. for your family and/or you have a home abroad, all citizens get the same deductions.

If all of your taxable income is being eliminated by the FEIE, you aren’t utilizing your standard deduction or your itemized deductions…you are already paying zero tax, so these deductions provide no added benefit. Converting to a Roth or investing in a Roth under these circumstances may save you tens of thousands of dollars each year.

Let’s run some numbers on the tax cost of converting to a Roth IRA.

One of my tax preparation clients has been living in Cayman Islands for a number of years. He earned a salary from his offshore company, which is incorporated in Panama, of $81,000 in 2012. All of his ordinary wage income is covered by the FEIE, so he pays zero U.S. taxes, and he has about $60,000 in a traditional IRA. His itemized deductions are about $34,000 for 2012, mostly the result of mortgage interest on his home in Cayman.

If this client were to convert his IRA to a Roth in 2012, his total tax bill on $60,000 would be only $2,300. This is because the Foreign Earned Income Exclusion eliminates his salary and he now gets to make use of his $34,000 in itemized deductions.

If this same client, who is married filing joint, had no itemized deductions or Schedule A and took the standard deduction, his IRS bill would be about $8,000.

Note: If this same client wanted to pay zero tax, he could convert some of his IRA to a Roth in 2012, and the balance in 2013 and/or 2014, thereby maximizing his itemized or standard deductions for each year.

If this Caymanian did not qualify for the FEIE, his U.S. tax bill on $81,000 would be about $4,200 (remember, he has significant itemized deductions). If he also converted his IRA to a Roth while paying tax on his salary, his bill would be $18,400. If he had no itemize deductions, his total tax bill, including the conversion, would be $20,500.

So, converting his IRA while qualifying for the FEIE, results in a savings of $16,100 ($18,400 – $2,300) for this client. Each person’s tax situation is different. You should contact a tax professional to determine your possible savings before deciding to convert your IRA to a Roth.

Considering the approaching “financial cliff,” it is safe to assume that U.S. tax rates will increase and deductions will decrease in 2013. Any change to the IRA rules, tax brackets or capital gains rates, may have a significant impact on your net tax due and IRA conversion options. If you qualify for the FEIE, converting from a traditional IRA to a Roth in 2012 rather than 2013 is likely to save some serious cash.

Converting to a Roth is as simple as contacting your provider and telling them you wish to convert. If you would like to move your IRA offshore, or need assistance with your 2012 Expat tax returns, please contact us at info@premieroffshore.com or (619) 483-1708.

$7 Million in Gold but no Estate Plan

11/25/2012/0 Comments/in My Thoughts, Offshore IRA, Taxation/by Christian Reeves

If you have ever attended an offshore conference, you have heard the story of two kings from Mr. Joel Nagel: Elvis Presley, whose estate was decimated by lawyers and the IRS, and Sam Walton, who left nothing but an old pickup for the vultures.

Today I will tell you about Walter Samaszko Jr. of Carson City, Nevada. At the age of 69, Mr. Samaszko passed away in late June of this year. He left over $7 million in gold bars and coins, $165,000 in stocks and bonds, and $12,000 in cash hidden throughout his home, but only $200 in a checking account.

Mr. Samaszko lived in the same small home since the 1960s, where he had taken care of his mother until her death in 1992. He had no close relatives, and, apparently, no close friends (it was about 30 days before his body was discovered). He left no will and no trust. Reports indicate that his estate will go to his first cousin, Arlene Magdanz, who lives in San Rafael, California.

The gold coins and bars had been minted as early as the 1840s and were from a number of countries, including Mexico, England, Austria and South Africa. The estimated value of $7 million is based on the gold weigh alone. It is likely that the collectors’ value will be much higher.

Mr. Samaszko was obviously a hardworking and intelligent man to have amassed such wealth. He also took great precautions against government interference and economic collapse. So, why no estate plan? Why work so hard simply to leave a large portion of the money to a government he clearly feared?

If we assume that the total value of Mr. Samaszko’s estate, including the collectors’ value of coins, is $8 million, here is the government’s cut:

1. Mr. Samaszko is “lucky” to have died in 2012, when the Federal estate tax only applies on amounts over $5 million. A quick calculation estimates Federal estate tax due of $1,008,000. Had he passed away in 2009, Federal estate tax would have been over $2 million.

2. Nevada does not have an estate tax and California, where his heir lives, has no inheritance tax. Had Mr. Samaszko lived in Washington State, his State estate tax would have been about $1 million.

3. There are a number of fees associated with probate (a legal process required when one dies without a living trust), which includes appraisal costs, executor’s fees, filing fees for the court, surety bond fees, legal fees and accountancy fees. Nevada has adopted a statutory fee schedule, but a judge may approve any amount he deems to be reasonable. Based on the particulars of this case, including the fact that there appears to be only one heir and no contest to probate, one might guestimate the estate fees at 4% to 10%, or $320,000 to $800,000.

If additional heirs are located, legal fees are likely to skyrocket.

With planning, Mr. Samaszko could have reduced or eliminated the bulk of these costs. The most basic tool would be a U.S. living trust. This would have controlled the distribution of the estate, may have included charitable contributions, and would have eliminated probate fees of $320,000 to $800,000. A do-it-yourself book costs about $30, and a lawyer may charge a few thousand dollars for a custom plan.

In addition, he could have diversified out of the United States and in to physical or certificate gold and stock investments around the world. The use of an offshore trust, Panama foundation, or offshore company would have maximized his protection and access to international markets. While it is advisable to have some assets at home and within reach, safety and prudence dictate an international plan to protect you and your assets.

There are a number of other U.S. estate planning tools available at little or no cost, but may be of great benefit if they are needed.

Many are available for free on the internet. These are:

1. Durable Power of Attorney: Allows you to designate to access and control your financial assets. It can take effect immediately, or it can “spring” into effect if an event you define triggers its operation, such as incapacitation or unavailability.

2. Prenuptial Agreement: This keeps your property separate from your spouses, and is especially important in second marriages where you may want to leave assets to your children.

3. Health Care Proxy: Also called a durable power of attorney for health care, this document identifies the person you’d like to make medical decisions on your behalf if you become unable to make them yourself.

4. Living Will: An advance health care directive, also known as living will, personal directive, advance directive, or advance decision, is a set of written instructions that a person gives that specify what actions should be taken for their health if they are no longer able to make decisions due to illness or incapacity. The most common directive is when a person wishes no extreme measures or life support equipment be used in their care.

5. HIPAA Release: A Health Insurance Portability and Accountability Act, or HIPAA, release allows medical professionals to discuss your medical condition with your personal representative. Without this form, the hospital may not be able to discuss your care with your representative.

6. Life Insurance: Life insurance allows you to take care of those who depend on you. If you do not have financial responsibilities, you do not need life insurance.

7. Business Succession Plan: If you are self-employed or own a business, and you want the business to continue after retirement or death, a succession plan must be in place. If your children will take over operations, a relatively simple agreement can be drafted. If you will sell some or all of the business, or there are multiple partners, a more robust strategy will be required.

There are two certainties in life: death and taxes. A detailed estate plan is the only guaranteed way to minimize death taxes and can include a number of tools that diversify your investments, maximize privacy, and plant your financial flag in a favorable jurisdiction.

An attorney with Premier Offshore Investor will be happy to discuss your options. Contact us for a confidential consultation at (619) 483-1708 or email info@premieroffshore.com with any questions.

Update: December 19, 2012

The gold coins were eventually valued at $7.5M and the entire estate went to a distant relative via judicial decree. For additional information, checkout CBS News.

The Storm is Coming – Issues Moving Your Assets Offshore

11/22/2012/0 Comments/in Offshore IRA/by Christian Reeves

The HIRE Act will turn international bankers in to unpaid IRS Agents.

By: Christian Reeves

Since 2011, the offshore industry has been preparing for a storm originating from the United States and its increased attention on offshore tax evasion and desire to maximize revenues from international sources. To support these collection efforts, the United States enacted the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act). As adopted, the HIRE Act includes a slightly modified version of another previously proposed bill, called the Foreign Account Tax Compliance Act of 2009 (FATCA), which contains a number of provisions attacking international bank accounts and transactions.

The HIRE Act comes in to effect on January 1, 2013, to be implemented to various degrees throughout 2013, with all banks falling in line by December 31, 2013. To avoid the confusion and problems that are certain to ensue, I strongly recommend you complete any contemplated international transfers before this date. If you are considering moving some or all of your retirement offshore, or opening an international corporation and bank account, now is the time to act.

The stated goal of the HIRE Act is to close perceived gaps in information reporting to the Internal Revenue Service and curb abuses relating to the use of offshore accounts by U.S. taxpayers. It is expected to have a widespread impact on the offshore community by making transacting and transferring money more difficult and costly.

Generally speaking, FATCA will implement a new 30 percent withholding tax on “withholdable payments” made after December 31, 2013 to a “foreign financial institution”, unless certain requirements are met. Under the new law, an FFI is broadly defined to include all non-US banks, asset custodians, and investment funds. A “withholdable payment” generally includes

(i) any US sourced payment – e.g., interest, dividends, rents, compensation – and

(ii) the gross proceeds from the sale of any asset that could produce US sourced dividends or interest. Since virtually all US sourced payments to offshore financial institutions will be within the scope of FATCA – whether or not any portion of a payment is allocable to a US person – it will place a serious reporting and compliance burden on an international bank.

It is expected that most international banks will comply with these regulations in order to maintain their U.S. correspondent accounts and their abilities to conduct business in and hold United States Dollars. Complying banks will be required to enter in to an FFI agreement.

In general, entering into an FFI agreement with the IRS will require the bank to

(i) collect sufficient information on all of its account holders to enable the FFI to determine whether the account holder is US or foreign,

(ii) report the following information about U.S. accounts to the IRS annually,

(A) The name, address, and U.S. Social Security number or U.S. Tax ID of each account holder which is a specified United States Person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and Tax ID of each substantial United States owner of such entity.

(B) The account number.

(D) The gross receipts and gross withdrawals or payments from the account (transactional records.

(iii) withhold 30 per cent of payments made to the FFI that are allocable to account holders that fail to comply with reasonable requests for identifying information or made to non-compliant FFI’s,

This means that 30% must be withheld from any transfer from a U.S. bank made to a non-compliant international bank. Of course, no one can do business in this manner, so the non-compliant bank would not be able to do business with any U.S. person or company.

(iv) close any accounts where identifying information about the owner of the account cannot be obtained within a reasonable period of time, and

(v) comply with IRS requests for additional information about any US account. In a chain of ownership that includes multiple FFI’s, each FFI in the chain generally must enter into and comply with an FFI agreement in order to avoid application of the new 30 per cent withholding tax upon pass through of any payment to an upper-tier FFI. Additionally, each FFI in a chain of ownership is considered to be a withholding agent potentially liable for collecting and remitting the 30 per cent withholding tax.

In order to meet the documentation, withholding, and reporting requirements of FATCA, participating FFI’s will need to make significant changes to a wide range of processes and systems, including procedures for existing and new accounts, marketing and client interaction, tax reporting and remitting, information technology systems, and legal/privacy controls.

These changes are certain to come at a significant cost to the banks for technology, accounting and massive human resource drains. It is difficult to estimate these expenses, but some banking professionals claim they will be in the hundreds of millions of dollars, while others have projected costs of $10 billion. The United States says it expects to increase revenues by $800 million per year.

One often missed component of the HIRE Act is the new civil penalties on taxpayers for failing to report their offshore accounts. The initial penalty for failing to disclose the required information in a timely manner is $10,000. If the failure to disclose continues for more than 90 days after the IRS notifies the taxpayer of a failure to report, the taxpayer must pay an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. The maximum penalty imposed is $50,000.

Additionally, the HIRE Act increases the accuracy-related penalty under IRC Sec. 6662(a) from 20 percent to 40 percent for underpayments which are attributable to understatement of undisclosed foreign financial assets.

The bottom line is that the HIRE Act will turn international bankers in to unpaid IRS Agents. And, these newly deputized Agents are certain to be even more aggressive or conservative in defining and reporting transactions because their banks futures, and their jobs, are on the line in each and every transfer.

If you are considering moving your retirement account or nest egg offshore, I suggest you complete the transfer before the end of the year. The HIRE Act is certain to cause significant confusion and delays in 2013 and you would not want to be caught in the wash. Even in a best case scenario, you may transfer money offshore, have 30% withheld, and be forced to claim that money back on your 2014 tax return. This could mean the loss of the use of your money for over a year, along with a significantly increased probability of being audited by the IRS.

For information on moving your IRA, 401(k) or other assets offshore, forming an international company, or opening an offshore bank account, please contact me for a confidential consultation at (619) 483-1708 or email to info@premieroffshore.com.

Warning

11/07/2012/0 Comments/in Second Passport/by Christian Reeves

The only countries that offer official citizenship and second passports without residency requirements are St. Kitts and Nevis and Dominica. There are a number of websites offering “grey market” passports, but, buyers beware! The vast majority of these are scams.

For example, I am often asked about offers of passports from for about $50,000. The constitution of Paraguay requires 3 years of residency before citizenship can be granted and the average timeline is about 4 years (3 years of residency and 1 year processing). Anyone promising immediate passports for purchase is either selling forgeries or skirting the system and running a risk of discovery and cancelation. If you give up your U.S. passport and your second passport is invalidated, you are truly up the river without a paddle.

Contact Us

Feel free to contact us with questions regarding second passports and economic citizenship in St. Kitts and Dominica. We will be happy to answer your questions and streamline the process.

Phone us at (619) 483-1708 or email info@premieroffshore.com for a free and private consultation.

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Dominica

11/07/2012/0 Comments/in /by Christian Reeves

Dominica is another Caribbean island that has been making a name for itself in the offshore world for the last several years. Its passport is not as travel friendly as St. Kitts, but the costs are much lower.

Officially the Commonwealth of Dominica, this island is in the Lesser Antilles region of the Caribbean Sea, south-southeast of Guadeloupe and northwest of Martinique. Its 290 square miles has a population of about 71,000. Dominica has been nicknamed the “Nature Isle of the Caribbean” and is generally considered one of the most eco-friendly and beautiful islands in the regions.

A second passport from Dominica will cost a family of four (applicant, spouse and two children under 18-years-old) of $200,000, plus $25,000 for each additional child under age 25. With filing, registration and professional fees, applicants can anticipate a total cost of $300,000. In other words, a family of four can obtain economic citizenship and second passports from Dominica for less than the cost of a single passport from St. Kitts.

Dominica offers three options to obtain a second passport:

Package A: Single Applicant	A non-refundable investment of US$100,000.00
Package B: Family Application One (Applicant and spouse)	A non-refundable investment of US$175,000.00
Package C: Family Application Two (Applicant plus spouse and two children below the age of 18)	A non-refundable investment of US$200,000.00
Package D: Family Application Three (Applicant plus spouse and more than two children below the age of 18)	A non-refundable investment of US$200,000.00 and US$50,000.00 for every additional person below the age of 18

Dominica’s application and other fees are also significantly lower than St. Kitts.

Application fee – US$1,000 per investor (Non-refundable)
Processing Fee – US$200 per applicant (Non-refundable)
Naturalization Fee – US$550 per applicant
Stamp Fee – US$15 per applicant

Considering legal and other costs, an individual applying for economic citizenship and a second passport from Dominica should expect to part with about $165,000, including the donation of $100,000. This is about half the fee charged by St. Kitts.

The Dominica passport allows visa-free travel to more than 60 countries, including the United Kingdom and CARICOM nations. Click here for list of visa free countries. Dominica imposes no residency requirements to obtain, nor maintain, citizenship and there are no taxes imposed on citizens who do not reside in Dominica; however, those who do reside in Dominica are subject to substantial taxes on worldwide income.

St. Kitts and Nevis

11/07/2012/0 Comments/in /by Christian Reeves

St. Kitts and Nevis are two islands in the Eastern Caribbean that became independent from England in 1983 and have a history of providing privacy, asset protect, and the best second passport available. This country of 51,000 is a member of the United Nations, its primary language is English, and its currency, the Eastern Caribbean Dollar, is pegged to the United States dollar at 2.7 to 1. Click here for additional information on the Eastern Caribbean Community.

Your St. Kitts passport will provide you with visa free travel to over 100 countries, including Canada, Great Britain, Hong Kong, Liechtenstein, Ireland, Sweden, Switzerland and Schengen States of the European Union. For a list of these countries, click here.

Your St. Kitts passport will also provide an easier path to residency in a number of countries, such as Monaco, Switzerland, Andorra, United Kingdom, and Bermuda, Cayman Islands, Bahamas and other Caribbean countries.

Most importantly, there is no residency requirement to obtain a second passport from St. Kitts. You are not required to live in St. Kitts and there is no travel, regular meetings with immigration representatives, or other annoying requirements.

Processing Time: In most cases, you will receive your St. Kitts passport in 2 to 4 months after submitting your application.

There are two programs that will lead to a second passport in St. Kitts:

Citizenship through real estate investment in St. Kitts, and
Citizenship by making a donation to the St. Kitts Sugar Industry Diversification Fund.

St. Kitts Passport by Real Estate Investment

The minimum investment in St. Kitts real estate is $400,000 per applicant. If there are two related applicants, such as a husband and wife, you can invest $800,000 in a single property.

Government fees for the St. Kitts real estate investment program are as follows (updated for 2012):

US$7,500.00 for due diligence background checks and processing fees for the main applicant;
US$4,000.00 for due diligence background checks and processing fees for each dependent of main applicant who is over the age of sixteen years;
On approval in principle of an application through a real estate investment

i. US$50,000.00 for the main applicant

ii. US$25,000.00 for the spouse of main applicant;

iii. US$25,000.00 for each child of the main applicant under eighteen years of age;

iv. US$50,000.00 for each qualified dependent of the main applicant above the age of eighteen years, other than his or her spouse.

Application processing fee is $250 per applicant

Legal fees are in addition to the costs above and vary significantly by applicant. Typical real estate and related expenses are as follows:

Purchase and Sale Agreement – 1% of the Purchase Price
Memorandum of Transfer – Approximately 1% of Purchase Price
Surveyor’s Fees – Approximately US$327.00 per acre
Government Fees – Registration fee of US$2.70
Assurance Fund – Purchase price divided by 500
Alien Landholding License Application – US$1,500.00 per applicant
Stamp Duty (on select properties): 2.5% – 6% of purchase price

In addition to the high transaction costs, there are a number of issues with the St. Kitts passport by investment program. For example, you must purchase a “program approved” property, which means the cost will be higher than for a non-approved comparable property.

Second, if you give up your citizenship and sell the property, it will lose its approved status and your sale price will be lower. In other words, you can’t sell the property to someone seeking economic citizenship, so the number of potential buyers and the sale price will be significantly reduced.

Third, real estate taxes and upkeep on a property you do not occupy may be prohibitive. The Comptroller of Inland Revenue assesses a property tax of 0.2% per year on market value.

Fourth, St. Kitts does not charge a capital gains tax when the property is sold. Instead, they have a 12% transfer tax due on the full sales price. So, even if you are selling the property at a loss, a 12% tax is charged on the transfer.

Fifth, I said that $400,000 is the minimum investment per application. However, this assumes you can find an approved property you wish to purchase in this price range. Many single family homes are significantly more expensive than this minimum investment and large homes can be in the millions on St. Kitts or Nevis.

In my experience, clients who will spend significant time in St. Kitts opt for the investment option and purchase a single family home. Those who will visit the island from time to time opt for the condos provided by Marriott (for additional information, click here) and the rest will prefer to acquire a passport by donation.

St. Kitts Passport by Donation

If the preceding page on the St. Kitts passport by investment option left you dazed and confused, as it does many clients, there is an easy solution. You can purchase your St. Kitts passport by making a “donation” to the Sugar Industry Diversification Fund (SIDF).

Under the SIDF Citizenship-by-donation option there are four cost structures based on family size:

$250,000 for a Single applicant,
$300,000 for an applicant with no more than 3 dependents (two children under 18 and a spouse),
$350,000 for an applicant with no more than 5 dependents (four children under 18 and a spouse), or
$450, 000 for an applicant with no more than 6 dependents (five children under 18 and a spouse).

In this program you simply pay the fees, gain economic citizenship and are handed second passport…with no strings attached. This is the recommended program for clients who do not plan to spend significant time in St. Kitts or Nevis.

The costs above do not include legal, due diligence, application, agent, and other professional fees. A single applicant should expect to pay out around $350,000 to complete the process.

New Life and New Passport

11/07/2012/0 Comments/in /by Christian Reeves

Second Passport Programs, Economic Citizenship and Passports by Investment

Let’s face it; American passports are not what they once were. In fact, Americans are giving up their citizenship in record numbers. For example, the U.S. embassy in Switzerland reports that hat it had processed 411 renunciations in the first nine months of 2012. This compares to 180 Americans giving up their passports in 2011.

While the number of Americans that turn in their passports is a small fraction of the estimated 35,000 to 40,000 U.S. citizens living in Switzerland, the rise in such renunciations is causing concern. “At the moment this phenomenon is bigger in Switzerland than anywhere else in the world,” the U.S. ambassador told the Handelszeitung newspaper. “U.S. passports are becoming less attractive due to the implementation of stricter U.S. laws.”

One of the major motivators pushing Expats and others to give up their U.S. passports is the Foreign Account Tax Compliance Act (FATCA) that requires banks worldwide to report the financial assets and transactions of their U.S. clients. The burdens this law places on international banks is enormous and most have decided compliance is impossible. The bottom line is that it’s not financially feasible for an international bank to maintain a team of experts to ensure compliance with this convoluted law…which means those with U.S. passports will be unceremoniously dumped by their banks.

If you are considering taking the drastic step of renouncing your U.S. citizenship, keep in mind that you must first have a second passport in hand. When you give up citizenship in one country, you must already have citizenship in another…otherwise, you will be without a country and without travel documents.

NOTE: Residency is not the same as citizenship. Many clients contact us with the plan of obtaining residency in countries like Belize or Panama, then giving up their citizenship. This will leave you without a passport and may have other draconian consequences.

There are four methods for obtaining a second citizenship and a passport:
1. If you have distant relatives in countries like Ireland, Poland & Italy, you might qualify for citizenship by ancestry.
2. If you marry someone and become a resident of just about any country, even the U.S., you can obtain citizenship after a few years.
3. If you are a long term resident of a country like Belize, Paraguay, or Panama, you can qualify for citizenship. 3 to 10 years.
4. You can purchase economic citizenship and a second passport from St. Kitts, Dominica and Austria.
If you are looking to opt out of the U.S. system any time soon, the only option is to purchase economic citizenship. A second passport by ancestry is open to very few and has become much more difficult in recent years. Citizenship by marriage may upset your current spouse and citizenship by residency will take years to complete. For example, the constitution in Uruguay requires 3 years minimum, and Panama is about 10 years. Even if you qualify for citizenship through residency, a second passport is not guaranteed.

Passports are granted by order of the President and often require a “contribution” to his election fund. I recommend St. Kitts over Austria is because of the high cost of Austria, because Austria imposes a residency requirement and because St. Kitts is just so much more efficient to deal with compared to the bearcats in Austria. An Austrian passport can cost upwards of $1 million plus legal fees, while a St. Kitts passport will cost $250,000 plus legal fees.

Offshore Bank Licenses go the way of the Dodo

11/03/2012/0 Comments/in Offshore Banking/by Christian Reeves

Offshore Bank Licenses go the Way of the Dodo

The issuance of offshore banking licenses to anyone willing to put up some cash is a thing of the past. Back in the day, if you wanted to get in to the financial services industry, all you needed to do was find a small Caribbean island somewhere, put $50,000 to $500,000, and open a bank.

Offshore Bank: A bank that can only do business with foreigners. An offshore bank costs much less to open and operate, when compared to a fully licensed bank. These are sometimes referred to as Class B banks.

Fully Licensed Bank: This is a bank with an offshore bank license that can do business with anyone…be they residents or citizens of the country of licensure or foreigners. A country always strives to protect its own, so the barriers to forming a fully licensed bank are traditionally much higher than for an international license. These are usually referred to as Class A banks.

Editor’s Note: Please click here to read a more recent and detailed article on Offshore Bank Licenses by Mr. Reeves (2014 update).
Editor’s Note: 2015 Post: Offshore Banking License Jurisdictions

An offshore bank might offer its CDs and investment products over the internet, through brokers in the U.S., and bolster their image by forming non-bank entities in more respected jurisdictions to act as marketing divisions. Even brokerages in the U.S. have created offshore banks and offered high risk / high returns through these entities.

Shockingly, a few of these offshore bank licenses were granted to poorly regulated institutions that became breeding grounds for fraud. One example I am very familiar with is Millennium Bank of St. Vincent. This bank was formed by a Swiss banker and operated under a Swiss Trust Company.

Why a Swiss Trust? When the bank was newly formed, they found it hard to get clients and purchased a 75 year old Swiss Trust Company to bolster their image.
The bank marketed 5 to 20 year CDs at outrageously high interest rates. If you wanted your money back before the maturity date, there were severe penalties. In 2009, Millennium Bank was shut down and charged with operating a $68 million Ponzi scheme.
For more information, see: www.sec.gov/news/press/2009/2009-68.htm

A case that garnered much more attention in the United States was that of R. Allen Stanford. Mr. Stanford formed Stanford Bank in Antigua and began selling investment products in the U.S. around 1992.
It was shown at trial that he repeatedly paid off the Antiguan regulators to hide a $7 billion Ponzi scheme. He was convicted in March of 2012 and sentenced to 110 years in prison.

I would like to note that Stanford also operated a bank in Panama with a full service offshore bank license. In this country, the regulators took their business seriously. When the bank collapsed, everyone with accounts received 100% of their money back. I have U.S. clients today who are still hoping and trying to get some money out of the U.S. brokerage firm and the bank in Antigua.

For more information, see: www.nytimes.com/2012/06/15/business/stanford-sentenced-to-110-years-in-jail-in-fraud-case.html?pagewanted=all

Of course, this is a situation where a few bad apples spoiled things for everyone. Most offshore bank licenses were given to banks offering legitimate and interesting investment products and were quite stable. However, they were bastions of privacy, and the governments of the world took this opportunity to force many of them out of business.

Cases like Stanford and Millennium reflect poorly on a small countries economy and banking sector. When investors perceive risk in a particular country or in the offshore sector in general, they want a higher return on their investment. When traditional banks are forced to increase interest rates paid to clients, their margins decline significantly.

Also, when banks with offshore bank licenses are perceived as higher risk by the major countries, these countries impose more due diligence and limitations on the offshore bank and its correspondent accounts. When the rigors of due diligence increase, the cost of compliance skyrockets and the bank must choose to play along or lose its ability to do business in U.S. dollars, Euros, Pounds, etc.

As a result of the changes to the industry, the only new offshore licenses being issued are to banks with full service charters from a major jurisdiction. For example, if you want an offshore banking license in Panama, you must already have a fully licensed bank in the United States, United Kingdom, etc.

Internet Scams: There are several websites offering to sell offshore bank licenses. Watch out! Most countries require an existing license be “reviewed” when it is transferred. Upon review, corporate capital may be increased, or other barriers may arise, making operation impossible.

So, what is an entrepreneurial international financial services company to do? One can always get a full offshore bank license in an international jurisdiction, such as Panama. If you don’t have the $10m to $20m in corporate capital required, I suggest you consider simpler options for setting up deposit taking entities, offering investment services, providing for Forex trading, etc. Some possibilities are the Swedish Credit Union, a Panama Offshore Financial Company, a Swedish Trust Company, a New Zealand Offshore Financial Company, a master/feeder fund in Cayman or BVI, or a Swiss Trust Company (yes, these are still available, even considering the cautionary tale of Millennium Bank).

The Panama Offshore Financial Company is a relatively new financial entity designed for businesses registered in Panama that wish to offer services such as payment processing, credit card management, the trading of metals, leasing, factoring, etc. These companies can’t take deposits or operate like a bank.

A New Zealand Offshore Financial Company can provide “Bank” type services for individuals and corporations worldwide without limitations on the number of clients, deposit amounts or currency. A NZOFC may engage in the following businesses, but may not use the word “Bank” in its name. It is the entity most similar to an offshore bank license.

-Deposit taking & lending

-Debit and credit services

-Issuing of financial guarantees and instruments

-Cash Management

-Current Accounts

-Term Deposits

-Issuing of CDs

-Wire transfer services

-Fund management

-Marketing of investments

Of course, today’s regulatory environment makes transaction processing, opening and maintaining correspondent (client) accounts, and reporting, a significant challenge. Even with an unregulated entity, such as those described above, owners and operators of companies in the international financial industry must take care and keep up with the many requirements of doing business.

When you combine the changes to the offshore banking industry with the challenges by U.S. and E.U. tax authorities, engaging in any type of international business is certain to become more difficult as time goes on. With legitimate banks forced out of business, privacy and security being lost at every turn, and a mad dash for tax revenues from any and all sources, you take your life in your hands when you operate an international banking or financial services company and, god help you if you stand in the way of the tax man.

In my experience, attacks on international banks and financial service providers are a precursor to assaults on individual liberties. Just take a look at the attack on Switzerland of a few years ago and how that led to persecution of everyday Americans.

We truly live in interesting times. As goes the financial sector goes personal privacy and security. Watch this industry carefully and follow the money!

If you would like additional information on offshore bank licenses and related entities, please contact us at (619) 483-1708 or email info@premieroffshore.com.

Editor’s Note: Please click here to read a more recent and detailed article on Offshore Bank Licenses by Mr. Reeves.

IRS Snitch Gets Rich

11/03/2012/1 Comment/in My Thoughts, Taxation/by Christian Reeves

IRS Snitch Gets Rich – UBS Whistleblower Receives $104 Million.

How much are 40 months of your life, and your dignity, worth? $104 million (or about $4,600 for each hour spent in prison) seems a good answer.

As you may have heard, The Internal Revenue Service awarded tax whistleblower and former UBS banker Bradley Birkenfeld $104 million for turning in his clients and giving insider information on the banks operations. This ultimately allowed the IRS to shatter the veil on Swiss bank secrecy, get paid a bribe or blackmail (how else can you describe paying money to avoid criminal prosecution) of $780 million from UBS, imprison hundreds of Americans, obtain records on 4,000 accounts, and raise $5 billion and counting in taxes and penalties.

Prosecutors have said they would have had no case against UBS without Mr. Birkenfeld, but they still sought one charge of conspiracy and prison time for this Good Samaritan. Mr. Birkenfeld was sentenced to 40 months and will probably do 85% of that sentence in one form or another. After serving 30 months, he was recently transferred to a halfway house in New Hampshire.

Clearly, Mr. Birkenfeld has seen the error of his ways and is on board with the IRS. He recently released the following statement through his attorneys: “The IRS today sent 104 million messages to whistleblowers around the world — that there is now a safe and secure way to report tax fraud and that the IRS is now paying awards,” and “The IRS also sent 104 million messages to banks around the world — stop enabling tax cheats or you will get caught.”

Well, before you decide to turn in your ex-spouse, business partner, or employer, you might like to know that the IRS has a history of screwing the whistleblower and denying claims for compensation.

In 2006, the IRS started a whistle-blower campaign which offers informants rewards of 15% for recoveries of less than $2m and 30% for recoveries in excess of $2m. However, the vast majority of claims submitted to the IRS go unanswered.

Of the cases that the IRS investigates, the usual time to completion is 5 years, you get a percentage of the amount recovered and not the amount assessed, and IRS records indicate they pay out an average of 4% of the money recovered, rather than 15 and 30%.

How can the IRS payout 4% on average when the regulation says 15 to 30%? Easy…they deny the majority of claims even after moneys are recovered. The IRS issues a letter saying they would have collected the money without the tip…that the tax cheat would have been found out through their normal audit procedures, and thus no money is due the whistleblower.

There are no appeals or legal remedies for the whistleblower. He or she is at the mercy of the Service.

While, I’m sure that there will be a flood of new cases coming in to the IRS Informant Program in the coming weeks, I’m just as certain that very few of these snitches will ever see a dollar for their efforts.

For additional information on the IRS program, and to tattletale on your friends and family in pursuit of a pay day, click here for the IRS website.

IRS Going After Cash Transactions

11/03/2012/0 Comments/in My Thoughts, Taxation/by Christian Reeves

U.S. Goes After Cash Transactions

The New York Times recently reported that Federal and state authorities are investigating a handful of major American banks for failing to monitor cash transactions in and out of their branches. The government claims that this may have enabled drug dealers and terrorists to launder tainted money, according to officials who spoke on the condition of anonymity.

It is alleged that the primary target of the investigation is the embattled J.P. Morgan Chase. Who, fresh off a scandalous trading loss of $5.8bn, is in no position to stand up to another political firestorm. It is also suggested that the government is looking in to several other big name banks, including Bank of America.

Before I get in to this story, let’s define our terms:

A cash transaction is one where someone withdraws or deposits paper money. This does not include checks or wire transfers. A bank is required to report any cash transaction in excess of $10,000, and any transaction the teller deems to be “suspicious.”

A suspicious transaction is usually a group of transactions that are structured to avoid the reporting requirements. For example, you go in to the bank each day and deposit $9,500, or in to two branches with $6,000 each time. If the teller (or computer) notices, then a Suspicious Transaction Report will be sent to the IRS.

Tellers are also trained to spot signs of generally suspicious behavior. For example, if a customer asks about the reporting requirements or anything related to taxation or the IRS that is suspicious. If the customer seems nervous or otherwise sets of warning bells, a report will be generated.

With that said, let’s get back to the story:

The Comptroller of the Currency, as well as prosecutors from the Justice Department and the Manhattan district attorney’s office are all gearing up to go after these banks in order to protect us from drug dealers and terrorists…YEH! We should all stand up and applaud our government’s diligence!

Well, wait a minute. Who is the actual target here? Is al-Qaeda really transacting giant piles of cash and fooling tellers and computers in to not reporting? Are the internal bank compliance systems, on which these companies have spent millions of dollars, fooled so easily?

As someone who has represented both clients and family members caught up in these currency transaction reports and suspicious transaction reports, I can tell you that banks take them very seriously. I can also tell you that the teller’s credo is report first and ask questions later…CYA all the way.

So, why the sudden focus on cash transactions? In my opinion, it is a new battlefield being tested against average U.S. citizens, with nary a terrorist in sight. Are self-employed persons cashing their checks rather than depositing them to avoid paying taxes? Are they structuring their transactions to avoid a currency report?

With international tax evasion, the IRS has the Foreign Bank Account Form and related penalties. With domestic tax evasion, the government as the Currency Transaction Report to target anyone who lands in their crosshairs. Much like the FBAR, attempting to avoid the filing of a CTR is punishable by up to five years in prison.

As you may recall, it was just six years ago that the Patriot Act came in law under George Bush. The reasoning behind this act, as well as those to follow (HIRE, FATCA, et al.), was to put a stop to terrorist money laundering. Well, the Patriot Act led to the IRS attack on the Swiss bank UBS, $5 billion dollars and counting in new tax and penalty revenues, and the prosecution and imprisonment of hundreds of U.S. citizens…without a terrorist to be found
Now, as the government increases pressure on banks to report anyone transacting in cash, or acting suspiciously, and turns bank tellers in to unpaid IRS Criminal Investigation Agents, a new battle is brewing between the IRS and the average American self-employed person who may be fudging on his or her taxes.

When this is over, two things will come of it: 1) the IRS will persecute a few to collect from many and 2) the number of anonymous cash transactions will be reduced significantly, with business being done by credit card, check or wire, thereby traceable and controllable.

Debtors Prisons in the U.S.?

11/03/2012/0 Comments/in My Thoughts/by Christian Reeves

Debtors’ Prisons are back in the U.S. of A.

As States search for ways to increase revenues, they have been using their weapon of mass destruction – their prison system – to bludgeon those unable to pay fines and tickets in to coughing up some cash. And it’s not limited to government agencies. Owe money on a medical bill, payday loan, or to a collection agency? You may well find yourself in jail.

While it sounds like something out of a Dickens novel that could never happen in the America which Obama claims is a shining beacon to the world, debtors prisons are back in a big way. More than a third of all States now allow borrowers who don’t pay their bills to be jailed, even when debtors’ prisons have been explicitly banned by State constitutions and Federal law. A report by the American Civil Liberties Union found that people were imprisoned even when the cost of doing so exceeded the amount of debt they owed. Stories of surprise arrests for unpaid debt have been reported in Indiana, Missouri, Tennessee and Washington.

Want a few examples? According to NPR, Robin Sanders of Illinois was stopped for having a loud muffler. But, rather than a ticket or warning, she was taken to jail for failure to appear in court. What was the charge? Failure to pay a $730 medical bill.

According to the Wall Street Journal, Sean Matthews, a homeless New Orleans construction worker, was incarcerated for five months for a $498 debt. While it cost the State $3,000 to hold and feed him, the creditor eventually got his money.

Following the lead of civil creditors, cities and towns are getting in on the act. The New York Times reported on the story of Gina Ray, who was jailed three times in Alabama for her inability to pay a $179 speeding ticket. By the time it was all said and done, the town and the collection agency had levied fines totaling $3,170 and she spent 40 days in jail. Adding insult to injury, a fee was charged by the government for each day she was incarcerated.

Then there is the case of the Illinois breast cancer survivor Lisa Lindsay. “She got a $280 medical bill in error and was told she didn’t have to pay it,” The Associated Press reports. “But the bill was turned over to a collection agency, and eventually State troopers showed up at her home and took her to jail in handcuffs.”
OK, hold on, you might say. This sounds ridiculous. If you fail to show up for civil court, the creditor simply gets a default judgment, right? Well, creditors have figured out a loophole that allows them to put you in jail until you pay-up.

Here’s how clever payday lenders work the system in Missouri — where, it should be noted, jailing someone for unpaid debts is illegal under the state constitution.

First, explains St. Louis Post-Dispatch, the creditor gets a judgment in civil court that a debtor hasn’t paid a sum that he owes. Then, the debtor is summoned to court for an “examination,” which is a review of their financial assets.

If the debtor fails to show up for the examination — as often happens in such cases — the creditor can ask for a “body attachment” — essentially, a warrant for the debtor’s arrest. At that point, the police can haul the debtor in and jail them until there’s a court hearing, or until they pay the bond. No coincidence, the bond is usually set at the amount of the original debt.

As the Dispatch notes:

“Debtors are sometimes summoned to court repeatedly, increasing chances that they’ll miss a date and be arrested. Critics note that judges often set the debtor’s release bond at the amount of the debt and turn the bond money over to the creditor — essentially turning publicly financed police and court employees into private debt collectors for predatory lenders.”

So, borrowers aren’t arrested for nonpayment, but rather for failing to respond to court hearings, pay legal fines, or otherwise showing “contempt of court” in connection with a creditor lawsuit…but the result is the same. Borrowers are in prison, sometimes for long periods, because they were unable to pay a debt.

Debtors’ prisons have a long and violent history in America, going back at least to the 1750s, and were abolished by Federal law and most States in 1883. They were the source of Shay’s Rebellion, where debtors’ prisons were emptied and a full scale revolt ensued in Massachusetts from 1786 to 1787. The uprising was eventually crushed after the State raised a private army, with creditors’ rights and debtors’ prisons being restored.

History and the constitution aside, there is big money to be made.For example, the State of Alabama charges a 30 percent collection fee for assisting creditors, while Florida allows private debt collectors to add a 40 percent surcharge on the original debt. “Many states are imposing new and often onerous ‘user fees’ on individuals with criminal convictions,” the authors of the Brennan Center report wrote. “Yet far from being easy money, these fees impose severe — and often hidden — costs on communities, taxpayers, and indigent people convicted of crimes. They create new paths to prison for those unable to pay their debts and make it harder to find employment and housing as well to meet child-support obligations.”

According to the ACLU: “The sad truth is that debtors’ prisons are flourishing today, more than two decades after the Supreme Court prohibited imprisoning those who are too poor to pay their legal debts. In this era of shrinking budgets, state and local governments have turned aggressively to using the threat and reality of imprisonment to squeeze revenue out of the poorest defendants who appear in their courts.”

It is outrageous to think that, in our enlightened society, which is a shining example of freedom and justice to the world, that creditors are manipulating the courts to extract whatever they can from people who can least afford to pay.

It is even more disheartening that courts are enabling and encouraging this practice in an attempt to prop up their fledgling budgets.