Offshore Tax for Americans Living and Working Abroad

eb-5 visa

Coming to America Tax Free with the EB-5 Visa and Puerto Rico

If you are thinking about coming to America, get ready for high taxes on your worldwide income. In this article, I will explain how to become a US citizen using the EB-5 Visa and Puerto Rico to pay near zero US taxes.

The US taxes its citizens, as well as green card holders and residents, on 100% of the money they make from all sources around the world. If you are living in the United States, America wants her share… and that share is often over 40% of your total earnings.

If you are operating a successful business from Hong Kong, and you move to the US, all profits of that Hong Kong business become taxable. If you move to America and then sell your home in Singapore, you will pay US tax on the capital gains realized.

There is one, and only one, way to get US citizenship without paying these taxes. That is to come to America tax free with the EB-5 Visa from Puerto Rico.

Because Puerto Rico is a US territory, US Federal immigration laws apply but US tax laws do not. The tax laws of Puerto Rico supersede the US tax rules for residents of the island. Because of this hybrid legal system, you can immigrate to the United States through Puerto Rico using the EB-5 visa and qualify to live tax free under Puerto Rico’s tax laws.

  • Resident: A “resident” of Puerto Rico is someone who spends at least 183 days a year on the island. Travel between Puerto Rico and the US is a domestic flight with no immigration checkpoint.  As an EB-5 visa holder, you may spend the rest of your time (180 days a year) in any part of the US you choose.

Once the EB-5 visa process is complete, you will be a US citizen with all of the rights and privileges of someone born in the US and who pays 40%+ in taxes. You will have a US passport and the right to live and work anywhere in the country.

The same is true of children born in Puerto Rico. Anyone born in Puerto Rico is a US citizen at birth, just as they are if born in a State. The only difference between Puerto Rico and the US in this case are its tax laws.

Here is a description of the EB-5 Investor Visa, a summary Puerto Rico’s tax laws, and how to maximize the benefits of both to become a US citizen tax free.

What is the EB-5 Investor Visa

The EB-5 investor visa is a path to US citizenship. Unlike many other US immigration programs, the EB-5 visa has no waiting lists, quotas, or lottery. The terms are simple – make the investment, wait five years, and become a US citizen by going through the naturalization process. If you follow the steps, citizenship and a US passport are guaranteed.

The investment required for the EB-5 investor visa is far higher than any other program. You must invest in a business that creates at least 10 new jobs and maintains those jobs for about 6 years (the total time to complete your citizenship process).

The amount of money you are required to invest will depend on where the business is located. Most cities in the US require an investment of $1 million. If you set up the business in a distressed region of the country, the investment is reduced to $500,000.

Basically, all of Puerto Rico is designated as a distressed region for the EB-5 investor visa. Any business created on the island will qualify for the discounted investment amount of $500,000.

Of course, you will need to keep the business operating and profitable for at least 6 years with 10 employees. If you can do that with $500,000 in capital, great. If it requires more, then you will need to invest more.

What is Puerto Rico Act 20 and 22

When the EB-5 investor visa is combined with the tax benefits of Puerto Rico, you may be able to immigrate to the United States, obtain a green card, and finally citizenship with a US passport, all without paying a dollar in tax.

In order to accomplish this feat, we combine the EB-5 Investor Visa with Act 20 and Act 22 in Puerto Rico. I will briefly summarize them here.

Act 20 is the business tax holiday that gets you a 4% corporate tax rate on any profits earned by your Puerto Rico company. The requirements are simple:

  1. The minimum number of employees required for Act 20 business is 5. However, to qualify for EB-5, you need 10. So, we setup an Act 20 company with 10 employees.
  2. The company must be providing a service from Puerto Rico to persons or companies outside of Puerto Rico. Internet marketing, call centers, import / export, sales teams, and any online business are good candidates for Act 20. Retail businesses, franchises and restaurants do not qualify for Act 20. They do qualify for the EB-5 visa, but not for the tax deal.

For more detailed information on Puerto Rico’s Act 20, see: How to Maximize the Benefits of Puerto Rico Act 20

Act 22 is the personal tax holiday. A legal resident of Puerto Rico, who purchases a home, spends at least 183 days a year on the island, and signs up for Act 22, will pay zero capital gains tax and zero tax on dividends from his or her Puerto Rico company.

When you combine Act 20 with 22, you get a corporate tax rate on profits of 4% and zero tax on distributions of dividends from those profits. The only tax paid is the 4% corporate rate.

I also note that salaries in Puerto Rico are lower than anywhere in the US and that they might be going lower. Minimum wage is $7.25 and a recent House bill exempts Puerto Rico from increases in the Federal minimum wage for the next 5 years.

For more information on recent legislation, see: Good News from Congress for Act 20 Business in Puerto Rico

How to Combine the EB-5 Investor Visa with Puerto Rico Act 20 and 22

In order to combine the immigration benefits of the EB-5 investor visa with the tax benefits of Puerto Rico, we can setup an internet business or other service based company for you on the island.  That company will have 10 employees and qualify under Act 20 and EB-5.

For example, the business might provide content, design, advertising, and SEO services to persons and companies outside of Puerto Rico. Alternatively, the business might import goods from China and sell them to a distributor in the US (may operate as a wholesaler but not a retailer).

For a complete list of services that qualify for Act 20, please send an email to

You may fund the business with $500,000 to $1 million in capital. Remember that the business must be self sufficient for at least 6 years and that your investment should cover costs until break-even. Your business plan must show a stable and profitable business will be operating from the United States with at least 10 employees.  

As I said above, profits of this business will be taxed at 4%. Dividends to you, a resident of Puerto Rico, will be tax free.

What if you Don’t Want to Live in Puerto Rico?

You are not required to live in Puerto Rico to qualify for Act 20 or for the EB-5. Only Act 22, the personal tax holiday, requires you be a resident of the island.

If you immigrated to the US with an EB-5 investor visa, and setup an Act 20 company, but did not live in Puerto Rico, you would pay 4% in tax on Puerto Rico sourced income. You could then hold net profits from Puerto Rico sourced income in the corporation tax deferred.

If you are living in the US, you would pay US tax on any dividends or distributions from that Puerto Rico company. You would also pay US tax on income from your investments outside of the US.

So, Act 20 will get you tax deferral in your EB-5 business. Act 22 gets you tax free distributions from that EB-5 business. Act 22 also cuts your US tax rate to zero on capital gains on assets acquired after your move to Puerto Rico.

How to Use an E-2 Visa to Expedite an EB-5 Visa Application

The EB-5 visa process is a long one. Remember that it comes with guaranteed US citizenship and green card.  As such, the process is demanding.

It will take well over a year to have your EB-5 visa approved. If getting into the United States as quickly as possible is important to you, then you might apply under the E-2 visa program first.

We can setup an Act 20 business with an E-2 and get your temporary visa in 30 to 90 days. This gets you and your family into the country.

You then operate the business with 5 employees under E-2 until your EB-5 is approved. When you get your green card under the EB-5, you hire 5 more employees for a total of 10. This is because the E-2 and Act 20 require 5 employees. When you are ready to upgrade to the EB-5, you can add 5 more for a total of ten employees in Puerto Rico.

Note that the E-2 visa is only available to those from treaty countries and has different requirements from the EB-5. For more information, see E-2 Treaty Investor Visa

How I can Help

We can assist you from start to finish in setting up an EB-5 and Act 20 compliant business in Puerto Rico. This includes writing the business plan, financial analysis, and everything related to applying for the EB-5.

Next we will incorporate your business, lease office space, hire and train employees, and get the business operating. This will include an Act 20 contract with Puerto Rico that will guarantee your tax holiday for 20 years.

We provide a turnkey solution in Puerto Rico that will maximize the benefits of the EB-5 and tax benefits of Puerto Rico. For more information, you can reach me directly at or by calling (619) 483-1708.

tax benefits of puerto rico

How to Maximize the Tax Benefits of Puerto Rico

The tax benefits of Puerto Rico for Americans are incredible. Puerto Rico is by far the best deal available if you’re willing to move you and your business to the island for a few years. Even if you move only the business, while you remain in the United States, the offer is hard to pass up. Here’s how to maximize the tax benefits of Puerto Rico.

First, here’s a summary of the tax benefits  of Puerto Rico.

Act 20 is the business tax holiday offered by cash strapped Puerto Rico. Under Act 20, a service business with 5 employees on the island will pay only 4% tax on Puerto Rico sourced income. Good candidates include businesses (or divisions of a business) which provide sales and support, internet marketing, graphics design, product research, financial advisory, loan servicing, website and network design and support, call centers, and almost any other “portable” business.

The catch is that you must have 5 full time employees in Puerto Rico. These workers can be at any salary or skill level, but they must be working full time and creating Puerto Rico sourced income. The purpose of Act 20 from the government’s perspective is to offer training and jobs to its people.

It’s possible for the owner of the Puerto Rico business to live in the United States and operate the business remotely. In that case, you (that owner) will draw a salary at fair market value from the Puerto Rico corporation and pay tax in the US on your income.  Only profits attributable to the workers in Puerto Rico is Puerto Rico sourced income.

If the owner of the business is living in the US, you get to defer US tax on the profits of your Puerto Rico company (less the 4% tax paid to Puerto Rico). When you take the money out of the company you will pay US tax on the dividend. If you are a resident of Puerto Rico, you won’t pay tax on that dividend.

Act 22 is the personal tax holiday. If you move to Puerto Rico, become a legal resident, buy a home there, and sign up for Act 22, all dividends from a Puerto Rico corporation to a resident of Puerto Rico are tax free. In addition, you will pay zero tax on capital gains. That’s right, the tax rate on assets acquired after you move to Puerto Rico will be zero.

Those are the basics and there are a number of additional Puerto Rico tax holiday programs that are beyond the scope of this article. For example, Act 73 covers IP development and holding companies. Using this statute, you can get to a tax rate of 4 to 8% on income from IP. Also, a number of tax credits are available.

For an article on this, which briefly compares Act 73 to Act 20, see PWC Summary of Puerto Rico Tax Credits and Incentives. Also, here’s an article about Microsoft using Puerto Rico for IP  (from 2013) and another on Puerto Rico and the Pharmaceutical Industry.

Then there’s Act 273 that allows you to setup an “offshore” bank in Puerto Rico and pay only 4% in tax on profits. This is by far the lowest cost offshore banking license available. For more information, see Puerto Rico Offshore Banking License.

This is all to say that Puerto Rico is working hard to become the offshore center for American entrepreneurs. If your business provides a service or is portable, you should give Puerto Rico a look.  

Here’s how to maximize the tax benefits of Puerto Rico.

To truly maximize the tax benefits of Puerto Rico, you need to move you and your business to the island. If you can combine Act 20 with Act 22, you will have a tax deal unmatched by any other jurisdiction.

You will pay only 4% on your business profits (Puerto Rico sourced active business income) under Act 20. Then you will then withdraw those profits as a tax free dividend at the end of the year under Act 22.

So, Act 20 gets you tax deferred profits held in a Puerto Rico corporation. Act 22 allows you to take those profits out of the corporation tax free.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Above I said that the tax benefits of Puerto Rico are unmatched by any other jurisdiction. The reason for this is simple: even fiscal paradises like Cayman and Panama with zero tax rates can’t come close to duplicating the benefits for Americans available in Puerto Rico.

Yes, I know that a 0% tax rate in Panama and Cayman Island is less than 4%. But, because Puerto Rico is a US territory, it can offer a deal on dividend distributions that foreign countries can can’t match.

So long as you are a US citizen you will pay US taxes… unless you live in Puerto Rico.

An American living in Cayman or Panama will pay US taxes on all capital gains and dividends received. They will also pay US tax on any salary earned over the Foreign Earned Income Exclusion Amount of $101,300. They won’t pay tax to Panama or Cayman, but they will owe the IRS big time if they make more than $100,000 a year.

That same person living in Puerto Rico will pay tax on any salary earned, 4% on business profits, and then be eligible to withdraw those retained earnings from the corporation as a tax free dividend.

Let’s say you have a business with net profits of $2 million. You can set up in Cayman or Panama and take out a salary of $100,000 per year tax free. The rest of the money will stay in the corporation tax deferred. When you withdraw the $1.9 million, you will pay US tax at about 40% (Fed and State), or $760,000. You get tax deferral by operating offshore, but, one of these days, you must pay the piper.

If that same business were operated from Puerto Rico under Act 20 and Act 22, you would pay PR tax on your salary of $100,000 at about 30%. Then 4% corporate tax on $1.9 million for a total of $106,000. Your net effective rate is 5.6% and goes down towards 4% as income increases.

To sweeten the pot further, Puerto Rico’s Act 20 comes with a 20 year guarantee. Considering how the political winds are blowing against offshore tax structures, a guarantee from a US territory is very valuable.

As I said above, Puerto Rico requires 5 full time employees. If you don’t need that many people, or your profits are closer to $100,000 than $1 million, then a tax free jurisdiction offshore might be more efficient. Here’s an article on Moving Your Internet Business to Cayman Islands Tax Free.

I’ll close by considering how you might carry the tax benefits of Puerto Rico forward once you leave the island.

Ok, you’ve setup your business with 5 employees in Puerto Rico under Act 20. You also took the plunge and moved to Puerto Rico under Act 22. A few years have passed and corporation has $5 million dollars in retained earnings.

You’ve had enough of island life and this business venture has run its course. It’s time to stop the carnival, take your winnings, and return to the US of A.

As I said above, you can take out that $5 million in retained earnings tax free. This is because you are living in Puerto Rico, qualify under Act 22, and the dividends are coming from a Puerto Rico company. The only tax paid was 4% to Puerto Rico for the right to operate your business from their jurisdiction.

You can now return to the US with your $5 million in hand with no taxes due to the IRS. The money is free and clear.

Of course, once you move back to America, giving up your Act 22 status, any interest or capital gains you earn from this $5 million in savings will be taxable by the Feds and your State.

There is one way to carry forward the benefits of Puerto Rico…

Invest some of that $5 million in to a single pay premium offshore life policy before you abandon Puerto Rico.

By moving your savings earned under Act 22 in Puerto Rico in to a tax deferred single pay premium life insurance policy you can continue to defer US tax on any capital gains generated by that money. Basically, you can create a multi-million dollar tax deferred savings account or a massive defined benefit plan without any of the retirement account rules.

Your cash will grow tax deferred inside the life insurance policy, just as it did in Puerto Rico. If you need to use some of that money you can borrow against the policy. Of course, your focus should be on building a tax preferred investment portfolio.

Should something happen to you, this life insurance policy will pass on to your heirs tax free (with a step-up in basis). In this way, it’s possible for you to provide a family legacy without ever paying more than 4% in US taxes.

I hope you have found this article on maximizing the tax benefits of Puerto Rico helpful. Please note that we at are not investment advisers nor do we sell insurance products. I will be happy to introduce you to an expert in this area.

For more information on moving you and/or your business to Puerto Rico, please contact me at or call (619) 483-1708. I will be happy to work with you to build a tax efficient operation in Puerto Rico.

IRS and panama papers

Mossack Fonseca Searchable Database Goes Online – Who Should be Afraid of the IRS and Panama Papers?

Do you have a company or bank account in Panama? Are you wondering if you should be worried about the IRS and Panama Papers? Do you know that the searchable database of Mossack Fonseca clients came online today? Is the thought of the IRS knocking on your door keeping you up at night?

Let me explain who should be afraid of the IRS and Panama Papers and who has nothing to worry about. Hopefully this will help most of you to rest easy, and those who have issues will take action before it’s too late.

First, a bit of background. A few months back, a hacker stole the records of one of the largest incorporators and law firms in Panama, Mossack Fonseca. The German newspaper Sueddeutsche Zeitung obtained the 11.5 million files and shared them with the Washington D.C.-based group of investigative journalists. This trove of documents became known in the press as the Panama Papers.

The Panama Papers have shone a light on many illegal uses of offshore corporations and offshore bank accounts.  As Vice put bluntly in April, “The politicians who have taken and made bribes, dodged taxes, and amassed fortunes of unimaginable scale are your politicians.”

  • Click here for my interview with Vice on who should be afraid of the IRS and Panama Papers.

Also exposed have been scammers and fraudsters hiding behind shell companies. For example, companies setup by Mossack Fonseca were used to dupe over 1,000 UK residents in a ponzi scheme.

I applaud the person who obtained these documents for shedding light on the dark side of the industry. Cleaning out those who use offshore structures to hide crime – or even hypocrisy – is a worthy goal that helps those of us trying to do things the right way. Those who use offshore companies within the law to minimize taxation and maximize privacy.

But, what about privacy for those who are following the law? What should reporters do with this data? Should they have the right to report on the private dealings of thousands of innocent people with legitimate uses for these companies?

Isn’t this akin to receiving stolen business records and financial data from Apple and putting in on the front page? No newspaper on the planet would do that… it would be immoral.

Does anyone have a right to know that Simon Cowell formed two offshore companies in the British Virgin Islands to buy property in the Caribbean?

What about the fact that Jackie Chan has an offshore company to manage his international projects?

What about Mossack Fonseca drafting the contracts for the sale of David Geffen’s 377-foot-long yacht? The boat was flagged in Panama, which is very common. Do we need to know this?

It appears that these were perfectly legal and compliant entities. Are they newsworthy?

Is there no right to privacy in our business and financial dealings? Do those who write on these topics owe a duty of care when using stolen data?

Job well done by the hacker… now how about some level of responsibility from the reporters?

OK, I’m off my soapbox. Back to who should be afraid of the IRS and Panama Papers.

If you or your representative used Mossack Fonseca to form your offshore structure, you need to be prepared for that information to become public. A searchable database of 200,000 offshore accounts, and thousands of companies went online today.

This online database will list:

  • The name of anyone listed as a director or shareholder of an offshore company formed by Mossack Fonseca.
  • The names and addresses of more than 200,000 offshore companies.
  • The identities of dozens of intermediary agencies that helped set up and run those structures with Mossack Fonseca.

NOTE: If you have a company in Panama, you should ask your incorporator who they used as the resident agent for service of process. If your lawyer or tax planning firm incorporated through Mossack Fonseca, your data is probably in the public domain. Premier Offshore has never worked with Mossack Fonseca.

Most clients list themselves as the director and shareholder of the offshore company. Those who decided to be as transparent as possible in their dealings with Mossack Fonseca will be listed in the database.

In fact, I would never setup a company with a nominee shareholder or officer. To do so would put your corporate assets at risk. Nominee directors in Panama are fine – they have no power.

  • It is possible to keep your identity private in Panama without using a nominee. You can incorporate a Limited Liability Company in another jurisdiction, and use that company as the shareholder. In this way, you keep control of the assets while maximizing privacy. For more on this, checkout The Bearer Share Company Hack.

If you are listed in the Mossack Fonseca database, should you be afraid of the IRS and Panama Papers?

If you’ve been filing your US tax forms and reporting your transactions accurately, you have nothing to worry about. To you, the Panama Papers is a data breach that has compromised your privacy, but nothing more.

I suggest the Panama Papers won’t even increase your risk of an audit. At most, the IRS will compare your filing to the database, find that you are in compliance, and that will be the end of it.

Considering that your offshore bank is reporting your transactions to the IRS under FACTA, the Panama Papers is only giving unto the IRS that which they already receive.

On the other hand, if you have an unreported account or company in Panama, you should be very afraid. You know that the IRS will download the Mossack Fonseca database and use it to find those who are not in compliance.  

If you’ve used nominee shareholders or as singors on your bank account to avoid FATCA, you are now in extreme danger. The IRS will consider this “wilful” and come after you with a vengeance.

But you still have time to take action and save yourself. If you signup for one of the IRS Voluntary Disclosure Initiatives before you become a target, you will pay only interest and penalties.

If you are deemed willful, and the IRS comes looking for you, you are at risk of significant jail time.

The IRS is currently offering five flavors of the Offshore Voluntary Disclosure Initiative.

  • Offshore Voluntary Disclosure Program (“OVDP”),
  • Domestic Streamlined,
  • Foreign Streamlined,
  • Transitional Relief, and
  • Delinquent FBAR.

If the IRS might consider your actions willful or intentional, you need the Offshore Voluntary Disclosure Program. This program one is the most costly and complex, but it will save your bacon if you are nearly in the fire. The OVDP gives you cover for your prior bad acts and a get out of jail card – not for free – but out of jail.

The OVDP requires you file 8 years of amended tax returns and FBARs, plut pay taxes, interest and a 20% penalty on whatever you owe. Now for the kicker, there’s also a 27.5% penalty on your highest offshore account balance. In some cases, that penalty may be 50% depending on the bank and timing.

  • If the bank where your account is located is under investigation when you apply for the OVDP, the government figures they would have caught you eventually and charge a 50% penalty.

If you are living abroad, or you have paid US tax on your income, but forgot to submit a form or two, you might qualify for OVDI Lite. Penalties for these programs range from zero to 5%, and the cost of getting back in the government’s good graces will be much lower than the OVDP.

No matter the cost, I can guarantee you that the risk of doing nothing far outweighs the financial burden of coming forward now.

To repeat, if you have an undeclared an account in Panama, you MUST take action before the IRS finds you. If you or your Panama structure are out of compliance, you should be very afraid of the IRS and the Panama Papers.

I also suggest anyone with unreported accounts or offshore companies in Panama should join the OVDI. Just because you were lucky and did not use Mossack Fonseca to incorporate your corporation, don’t think you are safe. I expect the IRS to pressure Panama to report all foreign structures owned by Americans. I think that this is just the tip of the offshore corporation iceberg in Panama.

I hope you found this article informative. Click here for my interview with Vice on who should be afraid of the IRS and Panama Papers. Please contact me at or call us at (619) 483-1708 for a confidential consultation on the IRS Offshore Voluntary Disclosure Initiative.

Puerto Rico Tax Deal

Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

The Puerto Rico tax deal is the inverse of the Foreign Earned Income Exclusion. Here’s why:

  • With a Puerto Rico tax contract you can live in the US, your first $100,000 or so in salary is taxable, with rest deferred at 4%.
  • If you live offshore and qualify for the FEIE, your first $101,300 is tax free in 2016 and the rest is taxable in the US as earned.

The FEIE is intended for those living abroad and operating a business that earns $100,000 to $200,000 max. The Puerto Rico deal is intended for those who live in the US or PR and net $400,000 or more.

This article will compare and contrast the Foreign Earned Income Exclusion with the Puerto Rico Tax Deal. There are still deals out there for Americans if you know how to work the system.

Here’s how the Foreign Earned Income Exclusion works:

If you live abroad and work for someone else, or have your own business, the Foreign Earned Income Exclusion is the best tool in your expat toolbox. The FEIE allows you to exclude up to $101,300 in salary in 2016 from your US taxes.

This salary can come from your own offshore corporation or from your employer. So long as the company is located outside of the US, and you qualify for the Exclusion, you’re golden.

If a husband and wife are both working in the business, they can each earn $101,300 in salary tax free for a total of $202,600. Take out more, and the excess is taxable in the US at about 40%.

Likewise, if you work for someone else, the amount you earn over the FEIE is taxable in the United States. If you work for yourself, and hold earnings in an offshore corporation, you can usually defer tax on these retained earnings.

To qualify for the Foreign Earned Income Exclusion, you must be 1) outside of the US for 330 out of any 365 days, or 2) be a legal resident of a foreign country, file taxes in that country, and travel to the US only occasionally for work or vacation.

  • What qualifies you a resident of a foreign country is a complex matter. For a more detailed article on the FEIE, see: Foreign Earned Income Exclusion Basics
  • The above assumes you are living in a low or no tax country and does not consider the Foreign Tax Credit.

The Foreign Earned Income Exclusion is an excellent tax tool for those willing to live and work outside of the US. If you wish to spend more than a couple months a year in the US, or to take out a salary of more than $101,300, the FEIE might not be your best bet.

Here’s how the Puerto Rico Act 20 tax deal works:

If you incorporate your business in Puerto Rico, you can qualify for an 4% corporate tax rate. That is to say, you can live in the US, operate your business through a Puerto Rico company, and get tax deferral at 4%.

In order to qualify, you must hire at least 5 full time employees in Puerto Rico and provide a service from the island to businesses or individuals outside of PR. Popular examples are affiliate marketers, website developers, investment funds, phone and online support providers, and any other business that is portable or operates via the internet. Really, any company that can put a division in Puerto Rico can benefit from Act 20.

  • If you don’t need 5 employees, we might create a joint venture that allows partners to share employees in one corporation that benefits the group.
  • EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

If you, the business owner and operator, live in the US, you must take a “fair market” salary that’s taxable and reported on Form W-2. This might be around $100,000, but the exact amount will depend on many factors. The remaining net profits of the income attributable to the Puerto Rican company will be taxed at 4%.

This is basically the inverse of the Foreign Earned Income Exclusion. With a Puerto Rico contract, you pay tax on your fair market salary and defer the balance at 4%. With the FEIE, the first $100,000 (or $200,000 if married and both are working in the business) is tax free and the excess is taxable at ordinary rates.

I note that the Act 20 offer is a better deal than the multinationals have in Europe. Most of them are paying about 12.5% for tax deferral. Even at 12.5%, their tax contracts are under constant attack by the US and the EU. If you want to out maneuver Apple, and get an offshore tax deal blessed by the US government, move your business to Puerto Rico!

So, what’s different about Puerto Rico? As a US territory, it’s tax code trumps the Federal Code… or, more properly put, PR’s tax code is on equal footing with the US Federal code.

This is not the case in a foreign jurisdiction. So long as you hold a US passport, you’re subject to US taxation. The IRS doesn’t give a damn about the laws of your new country. They want their cut.

The US code is clear when it comes to Puerto Rico: Income earned in a Puerto Rican corporation, or as a resident of Puerto Rico, is exempt from US taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.  

The code as applied to foreign jurisdictions is incredibly complex. Try reading up Controlled Foreign Corporations, Passive Foreign Investment Company rules, and Sub Part F of the code.

I suggest a Puerto Rico tax contract is best suited to firms with at least $400,000 in net profits that can benefit from (or, at least, break-even on) three employees in Puerto Rico. 

In contrast, the FEIE is great for those who wish to live outside of the United States and earn a profit of of $100,000 to $200,000 from a business. Additional tax deferral is available to business owners who live abroad operate through an offshore corporation.

I hope you have found this article on the Foreign Earned Income Exclusion vs. the Puerto Rico Tax Deal helpful. For more information, please send an email to or give me a call at (619) 483-1708. 

Offshore Tax Planning Puerto Rico

Blood in the Streets Offshore Tax Planning

You’ve heard the adage of investing when there’s blood in the streets… to buy when all hell is breaking loose and the market is at bottom. Well, now is your opportunity for some offshore tax planning while there’s blood in the streets. An offshore tax planning opportunity that will cut your corporate rate to 4%!

  • Baron Rothschild, an eighteenth century British nobleman, is reputed to have said, “The time to buy is when there is blood in the streets.” Those words are so true today in Puerto Rico and their offshore tax planning deal.

If you have not been reading the papers lately, PR is broke and the Federal Govt doesn’t want to bail them out. Specifically, the GOP says no way to a Puerto Rico bailout.

So the Feds have allowed Puerto Rico to create a Tax Incentive Strategy to try and bail out PR by offering a 20 year deal where companies only pay 4% on their retained earnings.

Yes you read that correctly only 4% – that is lower than what many very large corporations are presently paying to Ireland 12.5%. It’s the best offshore tax planning deal available to US citizens.

If you’re a small to medium sized internet business, or one that can spin off a division like marketing, call center, or similar group, here’s your chance to pay only 4% on your profits. Here’s how to make an offshore tax planning deal with a desperate government to defer tax offshore like the Apples and Googles of the world.

In fact, you can negotiate a offshore tax planning deal far better than the big guys. Most of their tax contracts in Ireland and Luxembourg are at around 12.5%.

The US government is offering you an offshore tax planning contract that allows you to live in the United States and cut your corporate tax to 4%. No need to move abroad, uproot your family, etc. It’s akin to the offshore tax planning tool generally referred to as a corporate inversion. These inversions have become all the rage where the business operations are outside of the U.S. but the headquarters and business executives remain here.

Here’s how this unique offshore tax planning opportunity works:

The U.S. territory of Puerto Rico is broke. The island is essentially bankrupt – owing creditors over $70 billion with no chance of repayment and a US bailout seems unlikely. But, as territory, PR is prohibited from declaring bankruptcy. As of December 1, 2015, they are out of cash.

Puerto Rico’s laws are a mixture of US Federal statutes and local ordinances. And that is where your opportunity exist: Income earned in a Puerto Rican corporation or as a resident of Puerto Rico is exempt from U.S. taxation. See: 26 U.S. Code § 933 – Income from sources within Puerto Rico.  

In order increase employment, motivate investment, and benefit from it’s unique position in the US code, the island offers two tax deals:

1. Start a business in Puerto Rico with at least 5 employees, apply for an Act 20 tax contract, and receive a 20 year agreement with a corporate tax rate of 4%.


2. Move to Puerto Rico, be approved for an Act 22 contract, and pay $0 capital gains tax on assets purchased after you become a resident and sold during your time on the island.  

Act 22 requires you to live in Puerto Rico for at least 6 months of the year. Act 20 does not. In this article I’ll focus on the Act 20 offshore tax planning contract for business owners.

If you don’t require 5 employees, we can create a joint venture company that will share costs and benefit the group. For example, if 2 partners come together in a “captive” internet marketing firm, they could license one business under Act 20. Different classes of stock and separate bank accounts could protect each partner’s interests.

To qualify under Act 20, your business should be providing a service in Puerto Rico to corporations or individuals outside of Puerto Rico. Internet marketers, website developers, investment advisors, hedge funds, call centers, and any other type of “portable” business are good candidates.

  • No matter your industry, if you can spin-off a division into a Puerto Rico corporation, you can benefit from an Act 20 contract. For example, I recently assisted a manufacturing company setup a web marketing group on the island.

Next, you need to hire at least 3 full time employees in Puerto Rico. These workers must be earning the minimum wage (currently $7.25) or better, be W-2 employees and not independent contractors, come into the office each day, and work at least 40 hours per week (full time).

Then, you, as the owner and operator of the business, must draw a fair market salary from the Puerto Rican company. This salary is taxable in the U.S. because it’s earned from work you did while living in the States.

The remainder of the income you earn in Puerto Rico is taxed at 4%. In other words, net profits in excess of your salary are taxed at 4%. You may retain these profits in your Puerto Rican corporation indefinitely tax deferred… an absolutely amazing offshore tax planning deal!

This gets you to a similar place as the Microsofts of the world… low cost offshore tax deferral. In fact, you’ve out maneuvered these giants by securing a deal at 4% rather than the typical 12.5%.

Puerto Rican profits must be left in the corporation, or can be moved to an offshore subsidiary. They can be used to grow the business and generally managed as corporate capital. You may not borrow against them or otherwise personally benefit from these retained earnings. They belong to the corporation until taken out as a distribution or dividend.

Now, here’s where things get really interesting in the Puerto Rico offshore tax plan:

With a typical offshore tax plan, profits are locked in the corporation. When taken as a dividend or distribution, they come out at ordinary income rates. Lower qualified dividend rates do not apply to distributions from a foreign corporation.  

Puerto Rico provides a path to tax free dividends not available in other offshore tax plans. If you decide to move to Puerto Rico after a few years of operating the business, and qualify as a resident under Act 22, dividends from your Puerto Rican corporation will be tax free.

Of course, you’re not required to move to Puerto Rico to cut your corporate tax rate to 4%. You may leave the money in the company tax deferred, take it out years or decades later and pay the tax, or continue to use it to grow the business.You can hold the Act 22 card in your back pocket should you decide to play it.

We can assist you to implement the Puerto Rico offshore tax plan in two ways.

  1. We can setup your corporate entity, negotiate an Act 20 contract in Puerto Rico, and write a custom a game plan / opinion letter on how to operate your Puerto Rican business in compliance with PR and US tax laws.


  1.   Provide a turnkey solution in Puerto Rico with office space, employees, etc. to maximize the benefits of your offshore tax plan.

Our turnkey solution includes analysis, tax and business planning, tax opinion letter with “action plan,” Act 20 application and negotiation, Act 20 license, and opening a PR bank account. It also includes sourcing and negotiating an office lease, hiring 3 qualified employees, 12 months of employee management, and 12 months of tax and business consulting service.

  • We will locate and hire 5 employees to your specifications. You can interview them by Skype or in person. We will also replace these employees if they resign or are not pulling their weight, manage their time, and handle all office and employment matters.
  • Our turnkey solution is intended to cover all first year costs related to setting up shop in Puerto Rico except salary, payroll taxes, and office rent.

I hope you have found this article on the offshore tax planning benefits of Puerto Rico helpful. For more information, please send an email to or give me a call at (619) 483-1708. 

For more information, you might read my post comparing the Puerto Rico tax deal with the Foreign Earned Income Exclusion.

FBAR Due Date

Change to the FBAR Due Date

The FBAR due date has been changed from June 30 to April 15. If you file an extension for your personal return, you will have until Oct. 15 to submit your FBAR.

Finally the US government has done something which makes sense. This change to the FBAR due date will help new expats big time. Here’s why:

The FBAR was due on June 30 which made no sense. Oh so many newbie expats missed the filing deadline because they assumed the FBAR was due with their tax return. And because most expats file extensions, especially those looking to qualify for the Foreign Earned Income Exclusion using the physical presence test, the June 30 deadline was missed.

Fyi… The FBAR is not filed with your Federal tax return. In fact, it is not filed with the IRS at all. The FBAR is sent to FINCEN or filed through the FINCEN portal online.

But now the FBAR due dates have changed from June 30 to April 15. This means the due date is linked to the due date of your personal income tax return. You still file the return with FINCEN, but it is due on the same date as your personal return

This change to the due date of the FBAR is applicable for taxpayers after December 2015.

With the change in dates of filing of FBAR there has been no change in the filing requirements. The standard rules are as follows:

  • The minimum amount of $10,000 is required to have in the FinCen 114 (FBAR) account and it should be filed.
  • Failure to timely file or failure to request for the extension to file the FBAR are subject to extreme penalties.
Foreign Pension

The Foreign Pension Tax Trap

If you’re working abroad for a foreign company, watch out for the foreign pension tax trap.  If you get caught, you might be paying double tax on your retirement income… once when earned by the U.S. and once at distribution in your country of residence.

First, let me say that this is not meant as a definitive guide on foreign pensions.  A proper analysis would review every tax treaty out there and thus be longer than War and Peace.  My intent is to identify the issues faced by U.S. expats with a foreign pension so that you may go to your local tax person, or Human Resources department, to discuss how to avoid the foreign pension trap.

Second, these issues do not concern expat entrepreneurs or business owners.  Presumably, you would utilize a U.S. qualified pension plan or defined benefit plan for yourself and avoid these problems.

Of course, if you are operating a small business, and your income is less than the Foreign Earned Income Exclusion ($99,200 in 2014), you don’t need to be concerned with a pension, be it foreign or domestic.

Now that I’ve buried the lead in the 5th paragraph, let’s talk about the foreign pension tax trap.  If you work for a foreign company, and have the option of taking a foreign pension, you need to understand the general rules (described here), the foreign tax credits available, timing issues, and specific tax treaty provisions between your country of employment and the United States, before agreeing to put cash in to a retirement program.

The reason a foreign pension can become a tax trap for the American expat is:

1) some foreign pensions are not compatible with the U.S. tax codes, 2) no treaty applies, and 3) your income is taxed in the U.S. as earned and taxed at distribution in your country of residence, which means the foreign tax credit may not be available.

So, while the foreign pension may appear to give you better tax treatment in your country of employment, if may result in double taxation.  Here’s why:

The general rule is that a foreign pension is not a qualified retirement plan (QRP) for U.S. tax purposes.  Therefore, contributions are not deductible on your U.S. tax return.

Because you are taxed on your worldwide income as earned, and because the income which flows in to the nonqualified plan is not deductible, it is included in your U.S. adjusted gross income and taxable here.

So, if you are earning $50,000 in salary and 15,000 in retirement benefits in France, the income reported on your U.S. tax return is $65,000.  You might have foreign tax credits to offset the $50,000, but no credits to cover the $15,000.

Then, when you withdraw that $15,000 from your account in France, you pay tax on it there.  Well, more than three years has likely passed and you are no longer able to amend your U.S. personal income tax returns to claim this credit.  So, you were taxed once in the U.S. when earned and then again in France when distributed.

That is to say, these general rules require a U.S. expat in a foreign pension plan to include in income the amount of the contributions made by him or her, as well as any contributions made by the employer to the extent vested.  Because you will probably need to pay tax in the foreign country when you take a distribution from the plan, it is possible that the contribution will be double taxed… but at different times.  This timing issue creates a mismatch of income and the availability of the foreign tax credit in the United States.

Relief may be available to some U.S. expats, but not all.  Several U.S. tax treaties cover foreign pension plans and, at least, eliminate double taxation.  You should discuss the availability of a tax treaty with your pension coordinator before signing up and getting caught in the foreign pension tax trap.

And, even if these treaty provisions exist, they will be limited to U.S. IRA amounts.  That is to say, they are limited to U.S. QRP levels of contribution from you and your employer, AGI limitations, and will have distribution requirements.  If your foreign pension is more generous, or has terms that are significantly different than a U.S. IRA, you are in for a very complex tax situation.

If you’re really lucky, you’re working in a country with an advanced pension treaty.  These exclude contributions to a foreign pension plan from your U.S. income, just as if the plan were in the United States.  Though, such treaties are typically with countries that offer retirement plans on terms similar to those found in the U.S., and whose tax rate is higher or about the same as in America.

At the time of this post, the countries with advanced pension provisions in their tax treaties are the U.K., Germany, the Netherlands and Belgium.

Another area of concern with a foreign pension is whether a withholding tax will be levied on you by your country of employment.  As an expat worker in a foreign land, it is likely the government will want to ensure your compliance by withholding any taxes payable… especially if you have returned to the U.S. after retiring or completing your work contract.

In many cases, the default rate of withholding is 30%.  If a tax treaty applies, this might be reduced to 15% (such as in the U.S. – Canada treaty).  There are even some treaties that eliminate the withholding tax all together, so be sure to discuss this issue with your representative.

The last consideration facing expats with foreign pensions are your U.S. reporting obligations.  It is possible you will need to file a foreign trust return (IRS Form 3520 and 3520 – A) to report the existence of the foreign pension.  If you have signature authority over the account, you probably need to report it on your Foreign Bank Account Report.  In some cases, IRS Forms 8938 and 8606 may apply.  Your filing obligations on your country’s applicable treaty and how your foreign pension is structured.  All I can tell you with certainty is that you should look carefully before getting in to a foreign pension arrangement and seek out the counsel of a qualified representative.

As you can see, tax planning for a foreign pension or foreign retirement plan is a complex business.  We at Premier do not offer foreign pension plans.  We can help the U.S. entrepreneur to form his own U.S. QRP or defined benefit plan and maximize the value of being offshore.

Likewise, if you already have a U.S. retirement plan, and are moving or investing offshore, we can help get your IRA out of the United States.  This is usually done by forming an offshore LLC or Panama Foundation and investing your U.S. IRA in to that structure.  Once this is complete, you’ll have checkbook control over the account and your investments.  Though, you are required to follow U.S. rules governing investments, act as the fiduciary of the account, and on distribution.

If you would like more information on taking a U.S. IRA offshore, pleas see my Self Directed IRA page (upper right menu of this site).  If you would like to set up an offshore corporation, or create a QRP for your international business, and you qualify for the Foreign Earned Income Exclusion (are a U.S. expat), we will be happy to work with you.  Please give us a call or send an email to

Retire Overseas Tax Free

Retire Overseas Tax Free

First, let me tell you about my inspiration for this post. France has been in the news and on this site quite a bit recently. They are pushing hard against America’s recent extortion of $9 billion from one of their banks, and I think this could have a major impact on the dominance of the dollar.

You might be wondering what this has to do with how to retire overseas tax free. Well, let me tell you. Like the United States, France taxes the heck out of its citizens … with the maximum rate reaching 75% on incomes over $1 million. These new tax measures have brought in about € 70 billion Euros ($94 billion) over the last three years, but are now driving French citizens out of the country in waves.

Even with this extreme tax rate, I’d swap my U.S. passport for a French one in a heartbeat. You see, France, like most countries, only taxes citizens who live in the country. Anyone can leave France and retire overseas tax free without making any special arrangements … just be out of the country for 163 days a year and you can live, work, and/or retire overseas tax free.

As a result, French citizens are moving to Portugal. This country doesn’t tax foreign pensions and, again, France doesn’t tax its citizens living abroad, so a French citizen may retire to Portugal and live tax free.

In our part of the world, there are many countries that won’t tax your U.S. pension (or your business income, for that matter), such as Panama, Belize, and Chile. Other nations, like Colombia, will only think about taxing you if you are there for more than a few years. In other words, you get to try them out before becoming subject to their tax laws.

Now, here’s the problem. While a French citizen can retire overseas tax free rather easily, Uncle Sam wants his cut no matter where you live. The U.S. taxes its citizens on their worldwide income, including pensions, retirement income, passive and active income, and all forms of compensation. No matter where you live and no matter where the income is generated, the default rule is that you must pay taxes. The rest of this post is about the exception to this rule.

For example, if a U.S. person retires to Panama, and earns $30,000 in capital gain, Panama won’t tax you, but the U.S. will. You are looking at standard U.S. long term (20% ObamaCare tax if applicable) or short term (ordinary) income rates on your income earned in Panama.

Here are four options to retire overseas tax free.

  1. Retire to Puerto Rico

The U.S. territory of Puerto Rico is a special case and is exempt from U.S. Federal Tax laws. As a territory, their rules take precedent over the IRS.

If you retire to Puerto Rico, live there for 163 days of the year, and become a (tax) resident of the island, you can retire overseas tax free. Puerto Rico will not tax your pension or other income, and their long term capital gains rate is 0% on assets (stocks, bonds, real estate, etc.) you acquire after moving. You will pay tax on things you owned before the move, but all stock bought and then sold after becoming a resident is tax free.

Let me clarify. If you retire overseas to Panama City, Panama won’t tax your passive income, but the U.S. IRS will. You will pay 20%+ on all long term capital gains.

This is the case because the default U.S. Federal tax laws control U.S. citizens in foreign countries. If you move to Puerto Rico, and become a tax resident of that U.S. territory, their laws govern and supersede those of the U.S. IRS … because Puerto Rico is a territory and not a foreign country.

Puerto Rico also offers business tax breaks and the above is just a summary of their tax deal for Americans who want to retire “overseas” tax free. Please see my two detailed articles on Puerto Rico for additional information.

  1. Give Up Your U.S. Citizenship

As I have said a few times, the U.S. taxes its citizens on their worldwide income. If you give up your U.S. citizenship, your duties to Uncle Sam are terminated and you may retire overseas tax free … you can’t retire in the U.S. tax free, but you can do so anywhere else you like.

The two most common issues or questions I get on this topic are:

If I give up my U.S. citizenship, can I visit America from time to time? Absolutely. If you have a quality second passport, you can enter as a tourist at any time. If your passport doesn’t allow for visa free travel to the U.S., then you can apply for a visa just like everyone else.

I have had a number of clients do this without issues. They dumped their U.S. passports and returned as a tourist to visit friends and family several times a year. Not one ever had a problem going through immigration.

I even had a client who gave up his U.S. citizenship and then was forced to return to the U.S. as a tax resident by his wife. She decided she couldn’t live so far from her family, so they both became U.S. resident/green card holders using their foreign (second) passports. Now, he is free to burn his green card at any time and go back to his tax free existence … so long as his wife allows it. Giving up your citizenship is a big deal, leaving and no longer being a resident for tax purposes is simple.

This first question begs the second: Do I need a second passport? Yes, you must be a citizen and have a second passport from a country before giving up your U.S. citizenship. If you don’t have a second passport, you would be a person without a country and unable to travel. It’s impossible to give up your U.S. citizenship until you have a second passport in hand.

You can obtain a second passport in three ways: 1) If you have family ties to certain countries, you can come a citizen through lineage … usually because your parents, or maybe grandparents, were born there. 2) You can become a resident of a country like Panama and may qualify for a passport within 5 or 6 years. 3) You can buy a passport from countries like St. Kitts and others.

For additional information on how to obtain a second passport, please see my page (top right menu of this site). We will be happy to help you buy a passport through one of these programs or to become a resident of Panama or Belize.

  1. Eliminate Most Capital Gains or Passive Income Sources

Assuming you don’t want to get rid of that blue passport just yet, you can minimize your taxable income by investing in tax free vehicles offshore.

*Of course, this assumes you don’t need capital gains to live on … that you can rely on your savings.

One option is offshore life insurance. So long as it’s U.S. compliant, the cash in your offshore policy will accrue tax free and may get a stepped up basis when you pass (transfer to your heirs tax free).

Another option to retire overseas tax free is to take only required distributions from your IRA or retirement accounts. These accounts can travel with you overseas, if you move them into an offshore IRA LLC or a Panama Foundation. Then, you can open offshore bank accounts and transfer your IRA or other retirement accounts to your country of residence. The same rules will apply offshore as they would onshore, so you can maintain the tax benefits of your retirement accounts overseas.

Finally, you might create an offshore Trust or Foundation and move your assets into that structure. While you will pay tax on any sales, you can accrue capital gains in the trust and use certain estate planning techniques (such as gift tax exclusions) to minimize or eliminate U.S. tax.

I also note that your IRA or trust can hole gold and real estate. You are not limited to stocks, bonds or treasuries. Certain rules apply to offshore retirement accounts, so please see my other articles for more information.

  1. Convert Passive Income in to Active Income

One of the best ways to retire overseas tax free … is to start a business! While this might sound strange, please allow me to explain.

If you are living and working outside of the United States, and qualify for the Foreign Earned Income Exclusion, you can earn up to $99,200 tax free from your foreign corporation in 2014. If a husband and wife both work in the offshore company, they can both draw a salary and get about $200,000 tax free.

The most common way to qualify for the Foreign Earned Income Exclusion is to move overseas and become a resident of a foreign country. So long as your business doesn’t involve selling to locals, nations like Panama won’t tax you and you can “retire” overseas tax free.

So, if you are an active investor, and spend most of your time trading stocks, maybe you are a professional trader and should incorporate offshore. If you are managing a number of rental properties, or buying land to develop into a multi-unit complex, maybe you are a professional real estate developer and should run that through an offshore company. Maybe your retirement includes selling goods or books over the internet and that should escalate from a hobby to a business. Any of these can become active income and qualify for the Foreign Earned Income Exclusion.

The key to operating a tax free business overseas rather than generating taxable capital gains is how much effort you put in to it. If you are spending 40 hours a week researching, reading, training, and trading, then you are clearly a professional trader. If you are spending 25 hours per week, then you might qualify. If you are regularly and continually searching for and managing real estate projects, you are probably a professional.

So, to retire overseas tax free, you need to spend as much time as possible on your income generating efforts, qualify as a professional in your trade or business, operate through an offshore corporation, qualify for the FEIE, and draw out your profits as tax free salary up to the FEIE and retain any excess in the offshore company.

I hope this article on how to retire overseas tax free has been helpful. If you have any questions, please give us a call or send an email to We will be happy to discuss these options with you and plan your new life overseas.

ObamaCare Tax

Avoid the ObamaCare Tax, Offshore Edition

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

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

The ObamaCare tax applies to the following forms of income:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dollar Will Fail

The Offshore Tax Inversion

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Collection Statute

IRS Collection Statute for Expats

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

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

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

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

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

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

Application of the IRS Collection Statute

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

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

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

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

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

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

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

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

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

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

IRS Audit Statute

Offshore IRS Audit Statute

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 business tax reporting

Offshore Business Tax Reporting Summary

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.

State Tax for Expats

State Tax for Expats

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Levy

How to Settle Your Expat Tax Debt

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 and search for “collection expense standards” to find national standards and local standards for housing and utilities.  No such standards are defined for those with expat tax debts.  The IRS negotiates your allowed housing and living expenses on a case by case basis.  This means that much of the burden of proving what is reasonable falls on you.

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

Expat Tax Debt Option 2:  Offer in Compromise

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

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

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

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

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

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

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

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

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

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

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

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

Expat Tax Debt Option 3:  10 Year Collection Period

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

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

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

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

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

Expat Tax Debt Relief Option 4:  Innocent Spouse Relief

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

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

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

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

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

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

Expat Tax Debt Considerations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Retire Abroad

2014 IRS Offshore Settlement Program

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  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.

Real Estate in an Offshore IRA

Distribute Real Estate in an Offshore IRA

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 1/10th 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 for a confidential consultation.  We will be happy to work with you to structure your offshore IRA in a tax efficient manner.

Cheap offshore Company

How to Prorate the Foreign Earned Income Exclusion

When you first move offshore, you will need to know how to prorate the foreign earned income exclusion. This is because, you will be using the physical presence test in your first year and, presumably, won’t move abroad on January 1, so you will need to prorate the foreign earned income exclusion.

Let me take a step back. As you probably know, the Foreign Earned Income Exclusion allows you to exclude $99,200 in salary from your US taxes in 2014. To qualify, you must be a resident of a foreign country (residency test) or be out of the United States for 330 out of 365 days (330 day test or physical presence test).

Under the physical presence test you can choose any consecutive 12 month period for your Foreign Earned Income calculation. So, you might have moved abroad on Mach 15, 2014 and begin your new job on April 1, 2014. Therefore, you will probably want to prorate the Foreign Earned Income Exclusion from April 1, 2014 to April 30, 2015.

In this case, you should be out of the U.S. 330 days from April 1, 2014 to April 30, 2015. You could use March 15th as your start date, but that would mean you lose 15 days of the exclusion and these 15 days can’t be recouped when you file your 2015 return.

I note that it is necessary to prorate the Foreign Earned Income Exclusion because most people don’t leave the good ole USA on January 1, so they need to prorate in the year they begin their new lives. Also, to qualify as a resident of a foreign country, you must be out of the US for a full calendar year. Therefore, the physical presence test is common in year one.

In the example above, it would be possible to use the 330 day test to qualify for the FEIE from Aril 1, 2014 to December 31, 2014, and then use the residency test to qualify for the exclusion from January 1, 2015 to December 31, 2015. However, this will not affect your exclusion amount. You will still need to prorate the Foreign Earned Income Exclusion. In other words, there is no financial benefit to converting to the physical presence test, though you will be able to spend more time in the United States. The prorated exclusion amount may not exceed the maximum allowable exclusion.

To prorate the Foreign Earned Income Exclusion, use the number of days you were physically present during the tax year over 365. That is to say, exclusion is calculated by dividing the number of days physically present in the foreign county or countries (numerator) by the number of days in the year (denominator). (See Publication 54, section on part-year exclusion.)

In the example above, your 2014 exclusion is April 1, 2014 to December 31, 2014, or 274 days. Each day is worth $271.78 ($99,200 / 365= $271.78), so you can exclude up to $74,467.72 in 2014. If you earned $100,000 in salary from April 1, 2014 to December 31, 2014, you will owe U.S. tax on about $25,500 ($100,000 – $74,467 = $25,532.28) because of the prorated Foreign Earned Income Exclusion calculation.

Prorating the Foreign Earned Income Exclusion is common in the first year an ExPat moves abroad. It is also possible to prorate if you are forced to leave the country due to civil unrest.

According to the instructions for IRS Form 2555, under Waiver of Time Requirements:
If your tax home was in a foreign country, you reasonably expected to qualify for the Foreign Earned Income Exclusion in that country, but were forced to leave because of war, civil unrest, or similar adverse conditions, the time requirements residency test or the 330 day test may be waived. You must be able to show that you reasonably could have expected to meet the minimum time requirements if you had not been required to leave.

To support this rule, the IRS publishes a list of countries and the dates they qualify for the waiver. If you left one of these countries during the period indicated, you can claim a prorated Foreign Earned Income Exclusion on Form 2555 for the number of days you were a resident of or physically present in the foreign country.

As I wrote above, you must reasonably expect to qualify for the Foreign Earned Income Exclusion in the affected country. This is aimed at contractors moving in to dangerous areas. Basically, if you move to a dangerous area, and then decide to leave or are forced to leave, you don’t get the benefit of this rule. If you move to an area after it is listed in the IRS publication, you are on notice that it is dangerous and don’t get the benefit of this section.

I hope you have found this article helpful. Please post any questions in the comments below and I will respond online. You may also contact me directly at