Research, News and Legal Services for the Offshore Entrepreneur

Offshore IRS Audit Statute

08/08/2014/in Articles, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore Basics – What’ Legal and What’ Not

08/06/2014/in Articles, Offshore Banking, Offshore Company, Taxation/by Christian Reeves

If you’re new to the world of offshore, then this article on offshore basics is for you. Thinking about starting a business abroad? Want to move you or your assets out of the United States? Offshore basics will tell you how… and what’s legal and what’s not for an American abroad. Many of the articles on my site are quite detailed. This one is intended to cover just the basics of going offshore.

First, let’s talk about the person living in the United States that wants to invest abroad. The bottom line is that Uncle Sam will tax your worldwide income. No matter where you invest, so long as you are living in the United States, there are very few breaks for going offshore… there are three exceptions below.

That’s not to say there are no benefits to moving your assets abroad… there are just no tax benefits in doing so. Investing abroad will give you access to dynamic markets, get you out of the United States dollar, and allow you to hedge or diversify much more effectively than you can here at home.

As for asset protection, so long as you set up the structure before someone comes after you, you’ll be able to maximize privacy and protection offshore. A trust or Panama Foundation will provide maximum protection and may minimize estates taxes.

If your estate is over $5 million, a well designed trust or Panama Foundation will get those assets out of your taxable estate and make the transfer to heirs more tax efficient.

Note that the income earned in the offshore trust is taxable to you, the founder or settlor. Passive or investment income is always taxable to you – the U.S. person and “owner” of the assets until your passing.

Transferring property to an offshore foundation, and then to your heirs will eliminate the 3.8% Obamacare tax on investment income. Your children will still pay tax at your rate, but should avoid the extra bump.

There are three major exceptions to the rule that investing offshore is tax neutral. They are: 1) the offshore IRA LLC, 2) the offshore captive insurance company, and 3) the offshore life insurance policy.

You can invest your retirement account in to an offshore LLC and keep the same tax benefits (deferral for a traditional IRA and tax free for a ROTH) you had onshore. If you invest with leverage or in to an active business, you may add a UBIT Blocker Corporation to your structure for big time tax savings not available in the United States. For more information on this topic, please see my various offshore posts on IRA and UBIT Blockers.

With an offshore captive insurance company, your business can (basically) reduce its U.S. taxes by $1.2 million per year… moving that money offshore. Any passive investment income that this premium generates is taxable in the U.S., but your business gets an immediate deduction for the $1.2 million insurance premium. If you would like more information, please send and email to info@premieroffshore.com.

The offshore basics for offshore life policy are basically the inverse of the offshore captive. You can invest an unlimited amount of after tax savings (money you have already paid tax on) in to a single pay life insurance policy. Any returns earned in the policy are tax deferred or tax free. This assumes it’s a U.S. compliant offshore life policy and typical underwriting guidelines apply.

So, if you are living in the United States, the IRS wants its cut. What about those of us living abroad? If you’re out of the U.S. for 330 of 365 days, or are a tax resident of another country, then you qualify for the Foreign Earned Income Exclusion and get to earn up to $99,200 in salary for 2014 free of Federal Income Tax. If you’re self-employed, operate your business through an offshore corporation, you can draw a salary up to the FEIE and leave the balance in the company as retained earnings. This will usually be taxable in the U.S. only when taken out as a distribution. You should be able to leave it there tax deferred for many years. For more information on these topics, please check out my articles on moving your business offshore and the Foreign Earned Income Exclusion.

Even if you’ll owe no tax because of the FEIE, you must file your U.S. tax forms each year.

If you retire abroad, you won’t see much of a tax benefit. Your passive income will be taxable in the U.S., though you should be able to avoid most state taxes.

That is to say that the offshore basics for a person who retires offshore is that their Federal tax rate will not change much. Their retirement, Social Security, and passive income will go to Uncle Sam. Most of the offshore loopholes are for active businesses.

There is one big exception… though, I guess, it’s not an offshore basic, because it isn’t offshore.

If you move (retire) to Puerto Rico, you can eliminate all capital gains taxes on your passive income. This only applies to assets you acquire after you move to PR, and requires you to become a resident of the island.

You see, when you retire to a foreign country, U.S. Federal law controls. When you move to the U.S. territory of Puerto Rico, their tax code takes precedence… and they have a great deal for you. See my articles on Puerto Rico for more information.

I’ll conclude this post on offshore basics with a suggestion: If you have a foreign souse or a foreign business partner, and are living abroad, you have some significant planning options.

A foreign spouse or partner is one who is neither a U.S. resident or a U.S. citizen for tax purposes. Anyone who holds a U.S. passport or green card is a U.S. person.

For example, your spouse can open an offshore bank or brokerage account and trade her funds without paying U.S. tax. She can also buy real estate and do business without the U.S. looking over her shoulder.

If you’re operating a business with a foreign partner, and that partner owns 50% or more of the business, you will find there are many tax advantages not available to a company owned 100% by Americans.

For example, the business will not be a Controlled Foreign Corporation, so its income may not be taxable in the United States (assuming it is not U.S. source income), and your filing obligations will be reduced. Take a read through the instructions for IRS Form 5471 for more information on your filing obligations.

I hope this article on offshore basics has been helpful. Feel free to contact us for information on moving your business or assets offshore.

Invest in What You Know with an Offshore IRA

07/28/2014/in Articles, Offshore IRA/by Christian Reeves

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

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

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

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

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

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

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

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

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

Offshore Business Tax Reporting Summary

07/25/2014/in Articles, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

Offshore Privacy Exists!

07/23/2014/in Articles/by Christian Reeves

Offshore privacy is available for U.S. citizens with offshore bank and investment accounts. If you know the tricks, offshore privacy is alive and well.

Unless you have been living under a rock, you know that the IRS has declared war on Americans with hidden assets and accounts offshore. There are 1.000 plus individuals sitting in jail right now for this exact “crime.” So, throughout this site, and in various publications, I ramble on incessantly on how offshore privacy is dead and that you must report your offshore bank accounts to the IRS or risk their wrath.

Well, the uber rich have built in backdoors to offshore privacy. If you know how the game is played, you too can have offshore privacy in your international banking and investments. Here are a few examples:

The best and biggest offshore privacy loophole is the offshore IRA. You can take your IRA offshore by forming an offshore IRA LLC and opening an offshore bank account, and you are not required to report either of these activities. That’s right, you do not need to file a Foreign Bank Account Report for an offshore bank account in the name of your retirement account. Also, you do not need to file a tax return to report an offshore LLC that is owned by your retirement account. Even better, your LLC and bank account maintain the same tax benefits as they had onshore, but with a much higher level of asset protection.

If you have a taxable offshore LLC and/or bank account with over $10,000, you are required to report them each year on your personal income tax return, on a tax report for the LLC attached to your 1040, and on the FBAR. If the account and assets of the LLC are sizeable, you might also need to file a statement of foreign assets.

If you, like Mitt Romney, have $100 million in an offshore IRA structure, you don’t need to file any of these returns or forms. So long as you know the rules of the game, you can maintain complete offshore privacy without running afoul of the U.S. tax laws.

Note that these offshore privacy laws don’t apply only to the rich and monster sized offshore IRA LLC accounts. They may have been added to the tax code at the behest of the “1%ers,” but we can all use them for maximum offshore privacy. Any IRA can be taken offshore and placed in an offshore bank account… though, I suggest the minimum size be around $35,000 because of the costs involved.

There are two other major areas of offshore privacy, and they apply to taxable assets (money not in a U.S. compliant offshore IRA). They are gold and real estate.

You can hold unlimited amounts of physical gold and real estate offshore in your name with no U.S. reporting requirements. In fact, you have maximum offshore privacy in all precious metals, so long as they are in your name and held in a vault outside of the United States. This applies only to physical gold and not gold certificates.

As you might expect, there are a few caveats when it comes to offshore privacy, gold and real estate. Most importantly, these assets must be held in your name, and not in an offshore corporation or LLC. If held in a Trust, they may be reportable.

You see the offshore privacy rules apply to the underlying assets (gold and real estate) but not to the structure. So, if you have Panama real estate in a Panama corporation or foundation, you must report the structure to the IRS. If you hold real estate in Panama in your name, you have no reporting requirement.

We are talking about reporting requirements here. When you sell the property, you must report it on Schedule D, Form 1040, and pay taxes on any gain. Offshore privacy does not affect your U.S. tax paying obligations… only your tax reporting obligations.

The same is true of gold and other precious metals. If you hold them in an offshore structure, including a reportable offshore trust, then the structure must be reported, which means offshore privacy is eliminated. Unless asset protection is a major concern, I recommend holding precious metals in your name only.

In many cases, offshore privacy might not be efficient for foreign real estate. There may be significant tax benefits for a foreigner to buy real estate in a local structure. You should discuss this with a local expert before deciding how to hold real estate.

A final note on offshore privacy and real estate: privacy applies to your ownership of the property, not any taxable events that result from that investment. If you have a rental property in Panama, you must report income and expenses on your 1040, Schedule E, just like a U.S. rental. Offshore privacy benefits refer to the reports required by the IRS, such as the FBAR and Report of Foreign Assets, not taxable events, like the sale of the gold or real estate, nor the rental income that comes from the foreign property.

I hope this article on offshore privacy has been helpful. You will find a detailed post on foreign real estate on this site.

If you would like more information on offshore privacy, to take you retirement account offshore, or for an asset protection structure to facilitate your international investments, please call us or send an email to info@premieroffshore.com. We will be happy to work with you. All consultations are confidential and free of charge.

What is U.S. Source Income?

07/21/2014/in Articles/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Controlled Foreign Corporation Defined

07/18/2014/in Articles/by Christian Reeves

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

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

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

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

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

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

What Does Being a Controlled Foreign Corporation Mean?

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

Now, let me translate that into English.

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

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

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

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

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

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

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

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

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

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

Buy Gold in an Offshore IRA

07/16/2014/in Articles, Offshore IRA/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

State Tax for Expats

07/14/2014/in Articles, Taxation/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to Settle Your Expat Tax Debt

07/09/2014/in Articles, Taxation/by Christian Reeves

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

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

Expat Tax Option 1: IRS Installment Agreement

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

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

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

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

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

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

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

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

For more on the IRS Installment Agreement, see: www.taxdebtrelief/247.com

Expat Tax Debt Option 2: Offer in Compromise

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

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

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

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

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

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

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

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

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

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

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

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

Expat Tax Debt Option 3: 10 Year Collection Period

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

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

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

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

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

Expat Tax Debt Relief Option 4: Innocent Spouse Relief

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

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

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

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

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

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

Expat Tax Debt Considerations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2014 IRS Offshore Settlement Program

07/07/2014/in Articles, Taxation/by Christian Reeves

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

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

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

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

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

2014 IRS Offshore Settlement Program Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS to Target Offshore Bank Accounts

07/04/2014/in Articles/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Anatomy of Offshore Tax Fraud

07/02/2014/in Articles/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore IRA Fees are Low, Guaranteed

06/27/2014/in Articles/by Christian Reeves

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Currency Transaction Report

06/26/2014/in Articles/by Christian Reeves

Today I’m taking time out from my offshore beat to warn you about the CTR. An IRS Currency Transaction Report is a form filed by U.S. banks and casinos each time you make a deposit or withdrawal of $10,000 or more. It is filed in secret, without your knowledge, you don’t receive a copy, and it becomes part of your permanent IRS file. An IRS Currency Transaction Report greatly increases your chances of an audit.

If you are a high stakes gambler, you should be aware that any casino transaction of $10,000 will result in a Currency Transaction Report being sent to the IRS. Just as high dollar wins are reported on form W-2G, buying in or cashing in high dollar chips is traced with a Currency Transaction Report. Both W-2G and CTR increase your chances of an audit and require you to prove 1) where the cash came from, 2) where the cash went, and 3) whether the cash was properly reported on your tax return.

IRS Currency Transaction Reports are filed by U.S. banks and U.S. casinos. These rules do not apply to offshore casinos. Also, offshore banks do not file CTRs … for now. I expect that will change soon enough.

If you are in a cash business, like a successful bar, or restaurant, you will generate an IRS Currency Transaction Report every time you deposit more than $10,000.

Now for the point of this article: Never attempt to avoid the IRS Currency Transaction Report. You might end up behind bars.

Yes, planning your deposits to avoid the CTR is a crime. While it might be hard to believe, there are Americans sitting in jail because they “structured” their cash transactions in an attempt to avoid a costly IRS audit.

And I’m not talking about terrorists, money launderers, or the likes of Al Capone. I mean ordinary citizens are sitting in jail for attempting to avoid an IRS exam by depositing $6,000 one day and $6,000 the next, rather than $12,000 all at once. Planning to avoid an IRS Currency Transaction Report is the crime of “structuring,” and it is punishable by up to 5 years in prison.

Never heard of structuring? Very few have, but ignorance of the law is not a defense to a criminal charge.

If you are in a cash business, you must have policies in place to track and deposit cash. Maybe you go to the bank every morning or maybe twice a week. Don’t vary your routine and never hold cash in your safe to prevent the CTR.

If you take steps to structure your affairs, you run the risk of your bank filing a Suspicious Activity Report. This will certainly bring down the weight of the Federal Government up on you and is far worse than and IRS Currency Transaction Report.

One interesting issue: If your policies result in your depositing around $9,000 twice a week, you might want to change to once a week. As strange as this sounds, it will guarantee the IRS Currency Transaction Report and avoid the STR.

As the United States works even harder to control its citizenry, and ensure only “approved or compliant” transactions get through, you can be assured that laws like the IRS Currency Transaction Report will continue.

Which is the Best Offshore Company Jurisdiction?

06/25/2014/in Articles, Asset Protection/by Christian Reeves

Want to know which is the Best Offshore Company Jurisdiction for your business or your assets? Are you considering living, working or investing abroad? Then this offshore company guide is a must read.

Please note that, when I refer to the Best Offshore Company Jurisdiction, I mean the best jurisdiction for your offshore structure. An offshore company can be a corporation, LLC, Foundation, or the manager of an offshore trust. Please see www.premieroffshore.com for a detailed article on whether an offshore corporation or offshore LLC is better for your situation. “Offshore Company” is a general term while “Offshore Corporation” and “Offshore LLC” refer to specific types of entities with specific uses and benefits.

In order to determine the Best Offshore Company Jurisdiction, you should consider a number of factors, including: (1) privacy and protection, (2) professional services and investment management options available, (3) international banking options, (4) for a business, available work force, (5) tax filing and payment obligation, (6) locals audit or reporting requirements, (7) world image/perception, and (8) countries that offer specialized structures (niche markets). I will consider each of these in turn.

Best Offshore Company Jurisdiction for Privacy and Protection

When new clients ask me which is the Best Offshore Company Jurisdiction, they usually mean which is the most secure – which offers the most privacy and protection for their assets. As you will see throughout this article, privacy and protection are important, but certainly not the only consideration.

After 10+ years in the industry, it’s my opinion that Belize and Nevis offer the best offshore company laws for the basic corporation or LLC. Both of these countries have one year look-back statutes, so, after the year is up, it becomes near impossible to attack a structure in these jurisdictions.

Belize and Nevis both have laws which are “client” or “business” friendly rather than “creditor” friendly. In the U.S. legal system, the emphasis is on paying any creditor who can come up with the most basic excuse to separate you from your savings. In Belize and Nevis, laws protect you from all claims except those where the transfer is deemed fraudulent.

A fraudulent conveyance is when you transfer money or assets out of the U.S. to keep them out of the reach of an existing or reasonably anticipated creditor. If you injure someone with your car today, and send all of your assets out of the U.S. tomorrow, that is probably a fraudulent conveyance. If you setup and fund an offshore company in Belize today, and injure someone six months from now, that transfer should be respected/protected.

I say Belize and Nevis are the Best Offshore Company Jurisdictions for basic formations because nominee directors and other advanced planning are not required. You can form an offshore corporation or LLC in these countries with one person – the beneficial owner. This makes them perfect for single member offshore companies, as well as for LLCs owned by U.S. IRAs or other types of retirement accounts. This also means these formations are less expensive to form and maintain lower government fees and no nominees to pay.

The benefit Nevis has over Belize is that anyone wanting to sue a Nevis company must put up a $30,000 bond before they can get in to court. If the plaintiff loses, this is used to pay the defendant’s legal fees.

While Belize doesn’t require a bond, they have the most modern corporation, LLC and trust statutes available. Also, lawyers are not allowed to work cross on contingency (getting paid only when they collect from the defendant). High retainers and legal fees in Belize have much the same chilling effect on litigation as bonds do in Nevis.

Another advantage Belize has over Nevis is a quality offshore banking sector, lead by Caye Bank and Belize Bank. While it is often recommended that you plant multiple flags offshore, and thus use a bank in a country other than where you are incorporated, I prefer to begin with a structure and bank from Belize and then expand from there. This is especially true of IRA LLCs and structures owned by U.S. persons because the laws and banks of Belize are very experienced in these areas.

Note that I said Belize and Nevis provide the best in basic privacy and protection without the use of nominees. If you require max privacy regardless of cost, then I prefer a Panama corporation owned by a Panama foundation. Both the corporation and foundation may have nominee directors and the beneficial owner (you) is not listed in any public registry. The only people who know your identity are your incorporation (premier) and your banker.

An added benefit of the Panama corporation/foundation hybrid is that the foundation may act as a trust to deal with any estate planning, bequests and charitable giving you wish to do with your foreign assets. Depending on your age and the size of your estate, this may provide significant estate tax benefits and giving options.

One drawback of Panama is that it does not have an LLC statute. This means U.S. retirement accounts can’t incorporate these. However, you may form an IRA LLC in Belize and then invest in to a Panama corporation. This corporation now can open accounts or buy rental real estate in Panama.

Best Professional Services for Offshore Companies

If you are looking for more than a checking account offshore, quality professional services may be important and often hard to find. Here is how I divide up the offshore investment management industry:

The best low risk higher return CD rates are in Panama. So are some of the best real estate, gold storage and mid-market investment management services. CDs at 3.25% are common from solid banks and loans are readily available to facilitate real estate investment.

In most cases, banks in Panama offer private banking services to accounts of over $500,000. I call this mid-market because other jurisdictions like Cayman start these accounts at $2.5 to $5m.

Don’t get me wrong. Panama does have some excellent high dollar private banks. In my opinion, the best of these is Andbanc where accounts begin at $2.5m and, while the parent bank is in Andora, the trading desk is in Panama, and thus provides maximum diversification and protection.

For the rest of us non-millionaires, Belize offers a wide range of investment products, multi-currency accounts, gold and metals, as well as investments that lead to residency in a variety of countries.

I’ve found the best of these is Caye Bank and Georgetown Trust. This bank does not have a minimum account size and Georgetown has investments at all price points. I suggest managed accounts should begin at $250,000, but some of their best returns are on items like Teak that requires about $15,000 to get in the game.

At the other end of the spectrum is Cayman Islands. Banks and investment advisors in this jurisdiction focus on the largest trusts, hedge funds, and high dollar private wealth management/family offices. I won’t take up space here rambling on about Cayman, but I can assure you they offer the best offshore investment management services. Please see my recent article on Cayman for additional information and baking information.

I note that not all banks and countries treat companies from other jurisdictions fairly. For example, I believe that the best offshore company jurisdiction in most situations is Belize. Well, Cayman makes it very difficult for offshore companies from Belize to open accounts at its banks. Preference is given to countries who make it into Cayman’s “Category III” list. This includes the U.S., U.K., and Cayman companies (obviously), along with Panama. While other countries make the list, I’ve found that, if you don’t want to pay the fees to incorporate in Cayman, the Best Offshore Company Jurisdiction to do business in Cayman is Panama.

Other countries have taken similar steps to protect their incorporation industries from low cost competitors like Nevis and Belize. For example, the make a Belize LLC eligible to do business in Panama costs thousands of dollars and requires a lot of effort. For this reason, Belize LLCs usually form Panama corporations if they wish to do business there. (IRAs require and LLC, so the Belize/Panama combo is common for retirement accounts).

Best Offshore Company Jurisdiction for Businesses with Employees

When selecting the Best Offshore Company Jurisdiction from which to operate a business, give very careful consideration to the cost, quality and availability of labor. I’ve seen many set up in beautiful tax havens or in the very lowest cost markets available only to find out it isn’t the right place for them.

Let me start with an example of what not to do:

I once had a high net worth client who wanted to start an offshore call center business. Money was no object and he was debating between Cayman Islands and Panama. He chose Cayman because it’s one of the most beautiful places on earth (certainly true). I advised him in the strongest terms possible that this was the wrong offshore company jurisdiction for a call center but he decided to go his own way.

After buying a home for $1.5m, leasing expensive office space, investing significant money in IT, and hiring a few employees, he began to understand how difficult it is to open a business in Cayman as a foreigner. First, the employment laws require a certain number of Cayman citizens per foreign employee. These locals come at a high cost and, in my client’s experience, low productivity. Next, he found that the cost of labor in Cayman was higher than the equivalent hire in Los Angeles. Finally, he quickly learned that lower cost call center sales people are just NOT available.

Combine this with requirements to have local partners and that operating costs turned out to be 35% higher than in California, and he was back at my door licking his wounds within six months of opening his doors in Cayman.

At the other end of the spectrum, several large and experienced companies in the offshore world have found it more efficient to move out of the lower cost regions, such as India, and in to Panama. For example, Dell, a pioneer in outsourcing tech support, has moved much of its operation to Panama Pacifico, which is about 40 miles outside of Panama City.

While wages are higher in Panama (call center workers earn about $13,000 per year), Panama offers a number of tax incentives to cover the difference. Also, it’s very easy to get work visas for foreign workers, qualified local labor is plentiful, and you get to operate in the same time zone as your U.S. clients. Gone are the days of working until 3AM only to have Americans get angry when they hear an Indian accent on the other end of the tech support line.

As you’ve probably figured out by now, I believe Panama is the Best Offshore Company Jurisdiction for a new business with employees. And I’m not alone in this opinion. Companies like Citibank, HSBC, MasterCard, and too many bio-tech firms to count, have all made the same choice – move to Panama City for quality lower cost labor, business friendly laws, and tax incentives.

Of course this influx of jobs has pushed up the cost of labor. What would cost you $800 per month two years ago is now about $1,000 per month (with an annual bonus of one month’s salary, this becomes $13,000 per year). You will be also find that office space in the best parts of the city will cost about the same as a large U.S. market. In fact, rents in Panama are higher than in my home city of San Diego.

Even with these higher rents, the cost of operating in Panama can be 50% or less than in the U.S. One client of mine, also in Panama Pacifico, traded U.S. salaries of $135,000 per year for high-end computer programmers in Los Angeles for Panamanians earning $4,500 per month or $58,000 per year. After running the Panama office for a year, he tells me his quality and efficiency is the same or better than it was in Los Angeles.

Tax Issues for Offshore Company Formations

When looking for the Best Offshore Company Jurisdiction, a country with low or no tax should be at the top of your checklist. For U.S. tax purposed, it matters little where you incorporate, where you hold your investments, and where you operate your business from.

The bottom line on U.S. taxation is:

If you are living in the U.S., offshore company formations are generally tax neutral. They should not increase nor decrease your U.S. taxes.
If you move an IRA offshore, profits should be tax free (ROTH) or deferred (traditional), just as they would be in the U.S. For advanced IRA investors, a VBIT blocker corporation may provide significant planners opportunities.
If you live outside of the U.S., qualify for the Foreign Earned Income Exclusion, and operate a business through and offshore corporation, you may be able to defer or eliminate all U.S. tax on active business profits. Significant planning is required.

So if you’re living in the U.S. and investing abroad, you want the most efficient structure that will ensure you pay no local (non U.S.) tax on profits. As I’ve said before, I believe Belize and Nevis provide the best protection with zero tax and the most efficiency available in an offshore company.

If you do pay tax in your country of incorporation or country where you are investing, the U.S. Foreign Tax Credit should eliminate any double tax.

If you are buying real estate in an offshore company, you probably require a company where the property is located. Want to buy land in Columbia? Trying to do this with a Belize LLC can be a nightmare… you need a Columbian company.

If you want to invest abroad with your IRA, you must use an LLC. The only countries I know of with compatible LLC statutes are Nevis, Belize, Anquilla, and Cook Islands. Of these, Belize is the best suited to the management of retirement accounts.

What if you want to buy real estate in Columbia with your offshore IRA? You will need both an offshore IRA LLC from Belize and a corporation from Columbia.

This extra entity will make life much easier and provides other benefits. For example, you can distribute out the share of the Columbian companies, rather than the underlying real estate, when you hit age 70 ½. This can reduce U.S. tax on a traditional IRA in an offshore LLC. Please see my various offshore IQA LLC articles for more detailed information on this, as well as how the corporation can act as a UBIT Blocker if you buy the property with IRA money and a non-recourse mortgage.

For the active business, I’ve made the case for Panama. However, the Best Offshore Company Jurisdiction for a business in Panama, especially one with employees, might not be Panama. (Confused yet?)

Let’s say you are running a website in Panama that sells books to people living in the U.S. We can call this business Amazonian.com. If all the income and profits come in to a company incorporated in Panama, local tax authorities may want to tax your business income.

To eliminate tax in Panama, form an offshore company in Belize and a company in Panama. The Belize IBC will bill your Amazonian clients and earn most of the profits. The Panama company will invoice the Belize IBC for its expenses such that it breaks even in Panama and minimizes taxes there. Of course the Belize IBC will pay no tax in Belize.

Now you are maximizing the benefits of both of the Best Offshore Company Jurisdictions… one for zero tax (Belize) and another to the best business laws and quality lower cost labor (Panama). You have also maximized the U.S. tax benefits of the Foreign Earned Income Exclusion and the ability to retain profits over and above the Exclusion in a tax free country (Belize).

Local Reporting Requirements

When I plan structures in the Best Offshore Company Jurisdictions, I try to avoid those with local reporting requirements. For example, all companies in Hong Kong must file audited financial statements each year. While this is an easy source of revenue for local accounting firms, I don’t see any benefit to the client. Therefore, I only incorporate in Hong Kong if I need an account on that island, want to do business in China, or to trade in RMB.

In most countries, such as Panama, Cayman and Belize, you are only required to file local (tax) returns if you have employees or are otherwise running a local business. Of course, of you open a bar on the beach in Belize, or operate a corporation in Panama with 20 employees, you will have local filing obligations. Otherwise, as an offshore company, you have no reporting requirements.

I note that, as an American living and working abroad, if you are using the residency test to qualify for the Foreign Earned Income Exclusion (as defined in various articles on this site), you should be filing a tax return in your country of residence. That doesn’t mean you need to pay tax, but you should be filing something.

World Image

There are times when the world image of your offshore company makes a difference. For example, someone doing business in Singapore, Taiwan and Hong Kong, might find their clients are more comfortable with a Hong Kong corporation than with a Nevis entity. This is especially true when the jurisdiction of your offshore corporation must be disclosed in contracts or marketing materials.

The same principles apply in the asset protection industry to large family trusts. Because of the availability of high-end asset managers, the largest and most complex trusts are created in Cayman Islands. Because Cayman does not have the strongest privacy and protection laws, many of these trusts have a “flight clause” that allows them to escape Cayman for a more secure jurisdiction, such as the Cook Islands, should they come under attack.

For those of us not in the 1%, not named Romney, and not running a business where world image matters to our clients, I again suggest that the Best Offshore Company Jurisdiction in which to plant that first flag offshore is Belize. If you are concerned that Belize may limit your choices for banking and investment advisors, I suggest that a Panama corporation owned by a Panama Foundation provides maximum privacy and is the most cost effective of the Category III countries. I also believe the Panama Foundation is the best asset protection entity available.

Offshore Company Specialists

A number of offshore company jurisdictions have become specialists in one niche or another of the incorporation industry. For example, the offshore asset protection trust, at least for Americans, was “invented” by the Cook Islands. This tiny country, just off of New Zealand, started the move offshore and out of the reach of U.S. judges who gave such deference to allegedly injured creditors.

To this day, the Cook Islands are the preeminent jurisdiction for asset protection trusts… not the largest in trusts by dollar value, but the best offshore trust jurisdiction for those focused on asset protection.

Side note: I’ve been working with Cook Islands Trusts for a decade and hold them in the highest regard. They’ve been thoroughly vetted through the U.S. legal system and are best for those expecting trouble or litigation. One reason for this assessment is that Cook Islands cases are heard in New Zealand courts. Therefore, you have legal experts and systems applying Cook Islands law, which means better quality legal representation and processes.

For those not anticipating imminent legal action, a Panama Foundation or Belize Trust may offer similar levels of protection at about half the formation cost and 1/3^rd the annual maintenance.

In the niche of Offshore Foundations, the only options are Panama and Liechtenstein. Of these, Panama offers many advantages in term of banking, privacy and protection.

The Panama Foundation is a hybrid asset protection tool that provides many of the same benefits as a trust, including estate planning, privacy tools, such as the nominee foundation council, and of a corporation, such as the ability to open bank accounts and manage assets directly. Especially when combined with a Panama Corporation for further diversification and risk segmentation, the Panama Foundation is one of the best offshore company options for after tax investing abroad – I say “after tax” because a U.S. retirement account or IRA can’t be placed in a Foundation, only an offshore LLC.

Another offshore company niche is the captive insurance company. These are usually based in the Bahamas (the largest) or Cayman, and basically allow a U.S. business to self insure and deduct up to $1.2m per year on their U.S. taxes.

Offshore captives are a complex topic and are best suited to doctors or other self-employed high-net worth individuals who can put away at least $800,000 per year. If you would like more information on Offshore Captives, please send us a message to info@premieroffshore.com. All consultations are confidential and free.

Another niche is the Offshore Hedge Fund. In this vertical, the Best Offshore Company Jurisdiction is the British Virgin Islands (BVI) followed by Cayman.

An offshore hedge fund is setup to allow foreigners (non U.S. persons) and tax preferred investors (IRAs, retirement accounts, pension funds, etc.) to invest in the United States without paying tax here.

For example, if a German citizen and resident were to invest in a U.S. fund or a small business, he would likely need to file and pay U.S. taxes as a result. If that same person invests in a fund structured in BVI, and the fund invests in the U.S. business, the foreign individual has no U.S. tax obligations.

The same is true of U.S. pension funds and retirement accounts. If they invest directly in U.S. funds, they will probably have to pay U.S. taxes on the profits. If they invest in a Cayman hedge fund that then invests in the U.S. business, they can eliminate these tax headaches.

If you are wondering how big these “niche” segments are in dollar volume, take a read through my Cayman Islands business guide.

The last niche market segment I will mention is credit card processing and merchant services. By far, the Best Offshore Company Jurisdiction for merchant accounts is the United Kingdom. If you form a U.K. corporation, you will be able to access a much larger pool of credit card processors, including those in Europe and Australia, than you will with a Belize or Panama entity.

If your business is based in Panama, and you have employees there, you will have access to many local merchant account options. If you have no presence in Panama, you will be limited to a few rather expensive providers, such as Multibank.

Of course, no one can compete with the low cost providers, including Pay Pal, of the United States. It might be said that the Best Offshore Company Jurisdiction for credit card processing is right here in America.

Yes, an account in the U.S. can be “offshore.” Let’s say you are living and working in Panama. Your parent company for billing purposes is in Belize (to minimize taxes in Panama). If you are a U.S. citizen with decent credit, have a U.S. mailing address and a U.S. bank account, you should be able to open a U.S. merchant account for about 1/2 or 1/3 of the cost of the same service offshore.

The proceeds of the credit card transactions will flow in to your U.S. bank account. You then invoice the U.S. Corporation that holds this account from your Belize IBC and wire the funds each month or quarter to Belize.

Note that a U.S. corp. is required for the system above because no one will open an account in the U.S. for a foreign entity.

So long as the U.S. company has zero profits at the end of the year, you file your U.S. corporate return, you qualify for the Foreign Earned Income Exclusion, and you have no employees in the U.S. or other issues which create U.S. sourced income, this merchant account is basically an offshore tool. For additional information see my article on offshore merchant accounts.

I hope you have found this guide to the Best Offshore Company Jurisdiction to be helpful. Feel free to call or email for a confidential consultation on moving your assets or business offshore.

The Mini Offshore Captive Insurance Company

06/23/2014/in Articles, Asset Protection/by Christian Reeves

The Mini Offshore Captive Insurance Company (sometimes referred to as a pure offshore captive) is a powerful and unique way to cut both your business and estate taxes while moving your assets out of the reach of future business and personal creditors. If you are operating a business with $500,000 to $1.2m per year in profits you want to eliminate from your U.S. tax return, and move in to an offshore asset protection structure, you should consider a Mini Offshore Captive Insurance Company.

Note: This article describes the Mini Offshore Captive Insurance Company. It is intended for those who wish to deduct up to $1.2m per year. The full sized Offshore Captive Insurance Company is a very different and more complex animal.

Let’s start from the beginning. The Mini Offshore Captive Insurance Company was created by Congress in 1986 and can be found in IRC S 831. This section of the U.S. tax code and the related safe harbor provisions, allow you to form an Offshore Captive Insurance Company to underwrite all types of business property or casualty risk. Your U.S. company may then pay up to $1.2m to this Offshore Captive Insurance Company, taking a 100% deduction in the year paid. This should result in a tax savings of about $420,000 per year. However, you must pay U.S. taxes on all passive income these premium payments/retained earnings generate.

I note that this savings is only available to those who form a licensed Captive Insurance Company. While you can self-insure using a sinking fund, you may not deduct transfers to a fund. Only payments to an insurance company are excluded from income when paid.

In order to be classified as a Mini Offshore Captive Insurance Company, you must agree to be taxed as a U.S. C Corp, make an irrevocable election with the IRS, and file U.S. returns on the calendar year in most cases. While this election is irrevocable, it is automatically terminated if you pay more than $1.2m in a year to the Captive Insurance Company. Thus, if you want to play in the big leagues for a year, you can do so and then file a new election to return to the minors.

Because a captive is taxed as a C corporation, distributions as dividends from a Mini Offshore Captive Insurance Company are considered “qualified” dividends and taxed at the long term capital gains rate.

Also, because of the Mini Offshore Captive Insurance Company’s unique standing in the U.S. tax code, you can move significant wealth out of your U.S. estate and away from the U.S. estate tax (which applies to U.S. assets in excess of $5m) as well as gift and generation skipping taxes. Assuming the offshore captive operated for 10 years, you could move as much as $12m offshore. To take advantage of these tax benefits, offshore trusts should be the owners of the offshore captives and your children and heirs should be the beneficiaries of these trusts. One trust per heir is suggested. And these returned earnings enjoy the highest level of offshore asset protection available. Because the premium payments are considered ordinary and necessary business expenses, there should be no risk of a claw-back from a U.S. court on issues of fraudulent conveyance. In fact, if the offshore captive was formed before a problem arises, I expect these transfers will be allowed to continue during and after litigation. You should consult an attorney prior to forming and offshore captive if this applies to you.

One additional benefit of the Mini Offshore Captive Insurance Company is that it provides a tax efficient way to compensate key employees. To use the captive in this way, you might operate a (second) offshore captive for their benefit or issue preferred shared from your primary offshore captive. These key employees would redeem these shares upon retirement and pay tax at long term capital gains rates, which should be lower than the tax on any other form of deferred compensation.

Above, I suggested you can form a second Mini Offshore Captive Insurance Company. In fact, you can from as many mini captives as you like, so long as they have different shareholders. This is a good way to accommodate shareholders with differing retirement and investment goals, multiply the tax benefits, and ensure you make the most of the estate planning options… especially when the partners are not related.

Watch out for the attribution and constructive ownership rules under IRC S 1563 that might combine offshore captives, thereby exceeding the $1.2m limit and crashing the system. Advanced planning is required if you wish to deploy multiple Mini Offshore Captive Insurance Companies.

If you do not have at least $500,000 to move offshore (I suggest this arbitrary amount as being cost effective), but have a group of entrepreneurs that want to plant that first flag offshore and begin building towards a full captive, you might consider a series LLC Mini Offshore Captive Insurance Company. In this case, a master LLC is formed in a state that allows for this and each partner forms his or her own LLC as part of the series… basically a subsidiary of the master LLC. The master LLC will obtain a mini captive license and each series LLC will pay in premiums as they see fit, up to a combined total of $1.2m. These series LLC will insulate the partners from each other’s assets and liabilities, allow them to pool resources to cover costs, and to insure much lower amounts of risk. Such an arrangement might be best suited to a group of professionals who wish to deduct around $250,000 per year each. By forming an offshore trust for each LLC member, investors will also receive the estate planning benefits.

Offshore Captive Insurance Company Must Provide Insurance

Because a Mini Offshore Captive Insurance Company must actually provide some type of insurance, and premium payments must be reasonable, at fair market value, and ordinary and necessary expenses of your U.S. business, forming an offshore captive is a rather complex and costly undertaking. These costs are the main reason I suggest a minimum annual principal payment of $500,000, or a series LLC to get your group to $1.2m.

In order to be classified as an insurance company by the U.S. tax code, you need 1) and insurance license from an offshore jurisdiction like Cayman, Bahamas, BVI or Vanuatu, and 2) to shift risks from the operating company or its affiliates to the licensed insurance company. In order to meet this requirement, you must show that the Mini Offshore Captive Insurance Company you formed is insuring specific risks of your business in exchange for a reasonable premium.

These requirements make the formation of an Offshore Captive Insurance Company a long process. Feasibility studies, capitalization, financial projections, risk analysis and premium value analysis, and the retention of a qualified insurance manager are all required before you can apply for a license.

The amount of capital required (capitalization) of the captive insurance company is based on the type and level of risks being insured and varies by jurisdiction. Capitalization may provide you with an opportunity to move after tax retained earnings or personal savings offshore for asset protection purposes. Alternatively, you might qualify for an irrevocable letter of credit to satisfy this requirement.

As a Mini Offshore Captive Insurance Company must provide insurance (insurance is in the name by gosh, but many ignore this aspect), a complete risk analysis is required. You must determine which risks you will cover “in-house,” which you will leave with your current provider, and the fair market value of these premiums.

The key to the risk analysis for a mini captive, compared to a full captive, is that you should insure only risks that have a low probability of occurring. For example, you might insure against product liability, war, major currency devaluation, labor strikes, workers comp, product recall, pollution liability, group pension plan liabilities, a nuclear explosion, and property theft from the office (usually minor claims only).

If you decide to insure risks with a higher probability, you may be able to purchase reinsurance at a lower rate than is available onshore.

Note that an insurable risk is one that might occur, not one that will occur. If an event will occur, even if the amount/cost of the event can’t be determined, it’s not an insurable risk. Payments in to an offshore captive for an event that will occur are considered deposits in to a sinking fund and are not deductible. (IRS rev. Rule 2007-47)

The last requirement I’ll cover here for Mini Offshore Captive Insurance Company is that more than 50% of its total revenue must come from premium payments (IRC S 816(a)). If interest, dividends or other passive income from investing premiums and initial capital exceeds income from premiums, you may lose your insurance company status and be considered a passive foreign investment company.

Remember that the owner of a Mini Offshore Captive Insurance Company gets to deduct 100% of his/her premium payments but must pay U.S. tax on all passive income. Treatment of premiums and passive income is much more complex for an offshore insurance company that doesn’t make the “mini” election and those with more than $1.2m in premiums.

The 50% of revenue requirement is not a problem during the first few years of operation. You might even expect to run for 10 years without hitting this PFIC limit. In later years, assuming your investment returns are significant, you may need to shut down the captive and form another, invest capital in more conservative products, or distribute out sufficient funds as qualified dividends.

Uses of a Mini Offshore Captive Insurance Company

So long as you make the proper election, adhere to the principles of risk shifting and insurable events, avoid excessive loan backs and anything that might look like self dealing, do not provide life insurance, and keep up with your IRS obligations, a Mini Offshore Captive Insurance Company is a very powerful international tool. It provides significant tax savings, unparalleled asset protection, and offshore estate planning not available elsewhere.

Now that you have a solid understanding of what a Mini Offshore Captive Insurance Company can do, let’s talk about who should consider forming one. An offshore captive is best suited for those with:

A profitable business that can deduct up to $1.2m from its U.S. taxes.
A business with multiple entities, or that can divide itself in to multiple operating subsidiaries – (if you have only a single entity, don’t worry, we can set these U.S. affiliates up for you).
A business with at least $500,000 per year in sustainable operating profits.
A business owner who wants personal and business asset protection and/or estate planning.
A group of independent professionals who want to go in together on a Mini Offshore Captive Insurance Company using a series LLC.

A few examples of potential clients are medical doctors, lawyers, investment advisors, hedge fund operators, family offices, and anyone with a mature business and a few million in profits each year.

For example, let’s say you are an investment advisor with $3m in profits P.A., 4 children, and a significant personal net worth. Your objectives for a Mini Offshore Captive Insurance Company might be to maximize wealth accumulation, reduce current income taxes, protect assets from personal and business creditors, and devise a tax efficient system to transfer wealth to your heirs.

You might decide to from a Mini Offshore Captive Insurance Company in Cayman. You might then form four offshore trusts in Belize, one for each of your children, to own the captive. In this way, the shares (and thus the assets) of the captive are lifted out of your U.S. estate and you can avoid both estate and generation skipping taxes.

During the formation state, the manager of the captive will need to perform a feasibility study and find a number of “real” or “insurable” risks to be covered by the offshore captive. In the case of the financial advisor, the study might identify ten risks and therefore wire ten separate policies. Each policy must apply the usual and customary insurance industry underwriting principles and must be reasonable in light of the risks being transferred to the offshore captive.

As a result, premiums paid by your investment advisory business are fully deductible in the year paid and the captive is not taxed on premium income. Only the investment income on money in the captive is taxable as earned (no tax deferral available). Also, distributions to the four trusts qualify as dividends and are taxed at 20% (was 15% in 2012).

I also note that the premiums paid to the offshore captive, as well as distributions to the four offshore trusts, are not subject to the claims of your personal creditors or the creditors of your investment management business. Because these payments are deemed ordinary and necessary business expenses, the offshore asset protection is iron clad.

I hope you have found this article helpful. The planning, formation, and management of a Mini Offshore Captive Insurance Company is a complex matter. I’ve done my best to summarize the basics. For additional information please send me an email to info@premeiroffshore.com or give us a call anytime.

Offshore IRA Roth Conversion to cut taxes

06/20/2014/in Articles/by Christian Reeves

Are you ready to retire with a large offshore IRA? Consider an offshore IRA Roth conversion. You have Romney sized IRA issues? This article will show you how to deal with your offshore IRA without getting crushed by the new higher tax rates with an Offshore IRA Roth Conversion.

Real Estate: For details on how to distribute real estate from an offshore IRA, see my offshore IRA real estate article on this site. The analysis below is focused on cash and stock accounts.

So, you took your IRA offshore a number of years ago and reaped the rewards of high returns and diversification. Now, you are facing forced withdrawals from that offshore IRA at ordinary income tax rates plus the multitude of Obama taxes.

We in the industry affectionately refer to the problem of how to extract money from an oversized offshore IRA as Romneyitis. You might read that much was made in the press of Mitt Romney’s (allegedly) $20M offshore IRA LLC structure . . .what a shame that all that money will come out at ordinary tax rates of nearly 40% when all the new taxes are added onto the typical 35% rate.

You don’t need to be a 1% to be crushed by the new tax rates. Most of these taxes hit families with incomes between $20K and $500K. If you take a withdrawal from an offshore IRA and get pushed into these brackets, an offshore IRA Roth Conversion might be in order.

Offshore IRA Roth Conversion Bracketology

The key to minimizing tax on forced withdrawals from an offshore IRA is managing your tax brackets. One of the best ways to play the IRA bracketology game is to prepay your tax now with an Offshore IRA Roth Conversion.

Yeah, I know a number of you just stopped reading. None of us like the idea of giving cash to Uncle Sam today for a benefit tomorrow. Those of you who are still with me, (thank you) and, prepaying your tax with an Offshore IRA Roth Conversion, this can lead to big savings. Here’s how:

In its most basic form, the Offshore IRA Roth Conversion is great for those with quickly appreciating accounts. It allows you to pay tax today and for your accounts to appreciate tax free thereafter with no withdrawal requirement. If the majority of your retirement account is locked in offshore real estate, ad you can afford to pay the tax, the Roth conversion cane make life much easier for your offshore IRA.

No matter how hard it is to accept, prepaying tax can be a solid tax reduction plan. So long as you can make the payment with cash that’s outside of your offshore IRA, and your tax bracket in retirement is likely to be the same or higher than it is now, IRA Bracketology is for you. Even better, if you’re in a lower bracket this year than you expect to be at age 70, convert your offshore IRA to a Roth immediately. You might be in this lucky group if you recently retired but are not yet collecting social security.

Slice and Dice Your Offshore IRA Roth Conversions

If you buy my argument that paying tax today can save you big in the long run (to be continued below), then you might consider slicing and dicing your offshore IRA to maximize the value of your Roth conversion. Put simply, you can divide your IRA into multiple accounts, convert them all to Roths and selectively revoke these conversion, on accounts that have gone down in value, by the due date of your return (October 15 on extension).

Much like the Offshore IRA LLC and the inherited IRA, I don’t believe this tax loophole will be around for long.

Let’s say you have $500K in an offshore IRA you want to convert to a Roth. First, slice this into five accounts of $100K each. Next, invest each into different (high return) opportunities. Maybe one goes into rental real estate in Panama, one into a currency trading account in Cayman, one into hardwood in Brazil, one to merging market debt and one into a BUI hedge fund.

Assuming you file an extension for your personal return, you have until October 15 to see how these investments perform. If you lost money trading currencies (as I always do), then you should undo that conversion. If your hardwood and real estate investments are appreciating nicely, keep them as Roth accounts and send the IRS a check.

Back to Offshore IRA Roth Conversions

If you are 55 to 70, an Offshore IRA Roth Conversion is probably a great move . . .but always a tough sell. The fact that you’ve read this far is much appreciated. I’ve seen cases where clients could save $500K in taxes over a number of years by converting a $1M offshore IRA, but just would not pull the trigger. Noone likes to pay the IRS today for a future benefit.

For those of you on the fence, here’s a look at the numbers:

You probably have a good understanding of your tax bracket. From her on, I’ll assume it’s 35%. Now, let’s talk about the bracket busters – four taxes that push you up over 35%.

First is the Obamacare tax. In order to cover the cost of the healthcare remodel, a 3.8% bonus tax applies to investment income if your AGI is above $250K (joint). For example, if your salary is $240K, plus capital gains and dividends of $35K per year, your AGI is $275K and the 3.8% bonus tax applies to $25K.

In the case of the Obama tax “investment income” does not include earnings in your retirement account or a withdrawal from an offshore IRA (or any IRA for that matter). It bumps up the tax rate on unsheltered assets like your after tax offshore brokerage account.

The same is true of withdrawals from an offshore Roth. These are not considered income. However, a withdrawal or conversion from a traditional IRA (pre-tax account) is added to AGI and counts toward the 3.8% healthcare tax. Therefore, a mandatory withdrawal from an offshore IRA can bump other income, such as dividends into the Obama tax bracket. If your only “income” is from an Offshore IRA Roth Conversion, this 3.8% tax does not apply.

If you have a Romney sized IRA, where your forced distributions are $100K-$200K per year, or your finances are such that these forced withdrawals from an offshore IRA will push you over the $250K threshold year over year, a Roth conversion might be just what the doctor ordered. Yes, you will pay the 3.8% tax on your 2014 unprotected income, buy you limit the pain to only one year of dividends and capital gains. In this situation an Offshore IRA Roth Conversion could save 20 years of bracket busting taxes of 3.8% on unprotected income.

The Obama tax is the biggest, but not the only bracket buster. For example, if your joint income is over $305K to $428K this can add 4% to your marginal tax rate (I’ve assumed a family of 4 and simplified the calculations a bit). If your income is just below this range, you will probably benefit from an Offshore IRA Roth Conversion.

The last bracket buster I’ll consider is the Medicare slam dunk. If your income is b3tween $170K and 428K, your Medicare premiums increase. In essence, this boosts your taxes by 2%. You can eliminate this tax by converting your offshore IRA to a Roth before you hit age 65.

If the above tax bracket busters apply to you, consider an Offshore IRA Roth Conversion. Also, if you are in a high tax state, or subject to AMT, then the benefits of converting are multiplied. AMT usually hits those with incomes of $200K to $500K.

Expat Tip: If you’re planning to move out of the U.S. (or to a low tax state), hold off on the Offshore IRA Roth Conversion. Wait until you obtain tax residency in your new country and then convert. This should keep the ex state out of your pocket.

I hope you have found this article helpful. Thank you for sticking with me. Feel free to phone or email to info@premeiroffshore.com anytime. We will be happy to help you move your IRA or other retirement account from a previous employer out of the United States.

A Cheap Offshore Company Cost Me $100K

06/16/2014/in Articles, Offshore Company Taxation/by Christian Reeves

Are you considering forming a cheap offshore company? Has some scammer in Nevis promised you tax freedom and privacy? Forming a cheap offshore company that does not include U.S. tax compliance is a roadmap to disaster for the American living, working or investing abroad.

How much would you be looking at in penalties for using a cheap offshore company formation mill? The most common error is failing to Ale the Foreign Bank Account Report or FBAR. Most get a penalty of $100K per year and are happy to avoid jail time.

Others get in to even more trouble for failing to file an offshore corporation return on Form 547 or one of the various LLC reporting forms. Those of you with complex asset protection trusts have even more risks. You may need to file a form when you fund the structure and Forms 3520 and 3520-A each year to report transactions in your trust. Add to this the requirement to report foreign assets in a variety of situations, and in improperly structured and reported cheap offshore company can cost you a fortune.

When asked how much a cheap offshore company will cost, I like to say about $100K. This is because the FBAR is the IRS’s first line of attack and other forms base their penalties on the amount of unreported tax or as a percentage of assets (i.e. an offshore trust). For the trust, the usual penalty is 25% of assets under management per year!

Back when I was defending cheap offshore company users, I commonly saw people who were out of compliance for multiple years and who owed more in taxes and penalties that they had taken offshore. In one case, a client put $75,000 offshore for a few years and ended up paying $225,000 in taxes, fines and penalties. . .and happy to pay up rather than sit in jail.

Some were not as lucky. U.S. jails are full of people who had a cheap offshore company and found themselves in theirs crosshairs – to eventually spend time

behind bars. How much does a cheap offshore company cost? If the IRS wants to make an example of you, about 3 to 5 years of your life.

The U.S. is one of the very few nations on earth that locks away its citizens for not paying taxes. In fact, America has put people away for failing to file a form when no tax was due (lawyers calls this a zero tax loss case). I personally know people in jail for 10 months for failing to file a form in a zero tax loss case. I know of another person who got 2 years home confinement on a zero tax loss case.

This is all to say, stay away from cheap offshore company formation mills unless you are an international tax expert, you are heading for trouble using such a provider because you can’t tell puffery and salesmanship from fact.

When you form an offshore company with Premier, we include 12 months of tax and business consulting services at no cost. Our U.S. tax experts are here to answer any questions from you or your tax preparer, explain what forms to use and when to file and make sure you in compliance with the IRS. We also assist with any business or banking questions – including opening additional bank or brokerage accounts in the first 12 months. We are always her to answer your questions.

While advice and consulting services are free, we also offer tax compliance packages for corporations, LLCs, trusts and asset protection structures that we have created. We do not prepare complex returns for structures we have not formed . . .this is just too much liability for us to assume from others’ mistakes.

We also prepare personal returns, Form 1040 and 2555, for anyone living and working abroad.

So, how much does a cheap offshore company formation cost? Too much! If you don’t select Premier to structure your international affairs, please use a U.S. attorney or firm that can keep you out of trouble. The cheap offshore company formation is not worth the risk.

For a confidential consultation, please call us anytime or send an email to info@premieroffshore.com. All discussions are private and there is no obligation.

Distribute Real Estate in an Offshore IRA

06/12/2014/in Articles, Offshore IRA, Taxation/by Christian Reeves

So, you’ve diversified your retirement account and invested in real estate in an offshore IRA. . .great. Now you need to take a distribution, what should you do? In this article, I will describe how to distribute real estate in an offshore IRA.

Rental real estate in an offshore IRA is one of the highest returning investments my clients have. The problem is, the primary asset can’t be divided up and sold to pay any taxes due on required distributions when you turn 70 ½ or at another age to reduce your net tax rate.

The same problem occurs when you decide you want to live in the property. To spend even one night in the home, you must distribute all of it from your account.

Note: One of the most common and reasonable questions I get is, “If I want to spend 2 weeks a year in the rental property, can I pay fair market value rent or take a distribution of 2/52nds (2 weeks out of 52 weeks in a year) of value?” The answer is a resounding NO. You may not spend any time in the property while it’s in your retirement account. The fact that the real estate is in an offshore IRA makes no difference – you must follow the same rules.

With this in mind, before you buy real estate in an offshore IRA, plan ahead for the forced distributions or the complete distribution if you plan to live in the property someday. This means you must have the cash in savings or in other liquid IRA investments to cover the taxes due.

Of course, if the rental property is cash flow positive, you can use the rental income to pay the taxes. However, because you should not use non-IRA money (i.e., savings) to cover IRA expenses, repairs, or costs incurred when the tenant moves out, be sure to run a reserve of several months before taking out funds to pay Uncle Sam.

The next item to consider early on when you invest in real estate in an offshore IRA is whether to convert to a ROTH. I will discuss ROTH conversions for offshore investors in more detail in a future article. For now, if you expect a return of 10-20% per year, and your income and tax bracket are low (maybe you recently retired), converting before buying real estate in an offshore IRA may pay off big. I understand it’s tough to pay taxes today for a potential savings in the future, but, if the upside is big in your market, you may take this tax gamble.

If you’ve held real estate in an offshore IRA for a few years, and it has maxed out on appreciation, then a ROTH conversion is unlikely to be beneficial. Now you need to consider longer term planning. For example, if you wish to live in the property 10 years from now, take a 1/10^th distribution each year. This will allow you to manage the tax payments and possibly reduce your total tax paid by keeping you in a lower tax bracket throughout the decade.

To re-title 10% of the property, you must go into the recorder’s office and enter the change into the record. Hopefully, as in most U.S. states, you can make the transfer at zero value.

Remember that each of these distribution sis taxable in the U.S. and made at ordinary income rates. I assume you have reached an age where distributions may be made without a 10% penalty.

Another way to reduce your net tax when you distribute real estate in an offshore IRA is to cut out your high tax state. If you are considering moving offshore, or to a lower tax state, make the move 12 months before you take the distribution.

For example, if you are living in California, a distribution of real estate in an offshore IRA may be taxed at 10% or more. The same distribution to a tax resident of Belize or Panama should be at zero state tax . . .of course, federal tax still applies.

Finally, the Foreign Tax Credit may apply and provide a dollar for dollar credit for any tax you paid to the country where the property is located. Considering IRA distributions are taxed at ordinary rates, it’s unlikely the Foreign Tax Credit will totally eliminate U.S. tax, but it will ensure you don’t pay double.

I note that some countries charge transfer taxes and duties rather than a capital gains tax. Special attention should be paid to these, because they may not qualify for the credit but might be added to the property’s basis and therefore reduce your taxable profit.

If you are considering taking your IRA offshore, or would like to set up a specialized real estate investment structure, please contact us at info@premieroffshore.com for a confidential consultation. We will be happy to work with you to structure your offshore IRA in a tax efficient manner.