Tag Archive for: IRS

The IRS to Seize 362,000 US Passports

The IRS to Seize 362,000 US Passports

The IRS plans to seize 362,000 US passports by refusing to renew passports of anyone with a substantial tax debt and now controls who is allowed to travel abroad. In this article, we’ll look at who is affected by this newfound authority and what you can do to protect yourself from the IRS.

Giving the IRS authority over your passport means that the taxman has the right to determine who travels outside of the country. Only those who have paid unto Caesar what he claims they owe shall be granted the privilege of international travel.

This represents a major change in how the United States government looks at the passports it issues. Americans have thought of a US passport as a birthright… or a right conveyed upon the select few who complete the immigration process. The passport tells the world that we are American citizens and gives us freedom of movement.

This all changed when the IRS asserted control over who is allowed a passport. As of today, a US passport is no longer a right, it’s a privilege. Only those whom the IRS deems worthy may travel. Only those who have paid their taxes are allowed to live and work outside of the country. Only those with clean tax accounts may visit family abroad.

Rest assured that the IRS will use your passport as a weapon to collect whatever taxes they believe you owe. If your passport is frozen because of a tax debt, there’s only one way to get it back. You must pay your debt in full.

Sure, you still have all the rights and protections you had before when battling the IRS. If you wish to dispute the amount owed, you’re free to do so. You can fight it out with the revenue officer, appeals, and finally the US Tax Court or in Federal Court.

But, this will take time. In my experience, an easy tax dispute case takes 6 months. A complex case, especially one involving a large amount of money, can drag on for years. Go to court and you’re looking at 3 to 4 years from the Notice of Deficiency to a resolution.

During this time, your passport will remain frozen. If you’re a US expat living and working abroad, can you really afford to return to the US for months or years to fight it out? Or will you be forced to pay up to get your passport back?

And what about us expats when the IRS begins revoking current passports? So far, the Service has only frozen passports, which means they refuse to renew a passport which has been lost or has expired. But the law also allows the IRS to revoke the passport of anyone who owes the IRS a substantial amount (more than $51,000).

If you’re an American abroad, and your only passport is revoked, you’ll be forced to return to the United States to settle your debt.

In most cases, expats learn of the loss of their passport when they attempt to enter a country and are refused. If this happens, you will be held in “airport jail” until the next flight to the United States. You will then be forcibly placed on a plane and sent home.

Yes, you will be the first fight to anywhere in the US. Whatever happens when you land, and how you pay your expenses once there, is your problem. If you have no family or friends to take you in, best of luck. When your only passport is revoked, the airline is required by law to return you to your home country for free, so they can give a damn where you’re dropped off.

You have no right to appeal or to an attorney. Because you were not allowed to “enter” the country, you have no legal rights. You are not being deported, you’re just being refused entry. The ONLY option at this point is the first flight back to your home country.

And I expect this to become standard practice by US agencies. Now that the government is treating your passport as a privilege rather than a right, I expect other agencies to take notice and get in on the money grab. What about expats with student loan debt, back child support, state taxes, or any number of other debts payable to government agencies?

Here’s How to Know if Your Passport’s Frozen

Basically, anyone who owes $51,000 or more to the IRS will have their passports frozen. This includes tax. interest and penalties. Thus, it’s very possible for a debt to have started out at $20,000 or so and to have grown to more than $51,000 with interest and penalties over a few years.

Also, any expat with a penalty for failing to report their foreign bank account (to file the FBAR form) or any of the offshore reporting forms (5471, 3520, etc.) is likely over the $50,000 limit. These penalties are often $50,000 not including taxes due.

Likewise, anyone who hasn’t filed their US returns should be worried. If the IRS computers have any information on you, they will create what is called a Substitute for Return on your behalf. These computer-generated returns create a tax debt in the system. This automated debt, plus interest and penalties, will then be used to freeze or rescind your passport and your travel privileges.

Quite a few expats end up in debt to the IRS computers because they don’t file their returns The biggest concern is with expats who have unfiled returns and a US brokerage account. The expat earned a small amount of money abroad or maybe was retired. He also had a small gain or loss in his US brokerage account.

The bottom line is that he didn’t think the gains were significant enough to bother filing a tax return… and he would be wrong, very wrong.

Your brokerage reports only sales to the IRS. That means IRS computers see only half of the transaction, the sale. They don’t know how much you paid for the stock and don’t know that you lost money unless you file a return.

You may have sold $1 million in stock for which you paid $1.2 million. You really lost $200,000, but the IRS computers calculate your tax due on a gain of $1 million! This happens all the time, especially with volume traders. A day trader could have used the same $100,000 in cash to generate millions in sales and still lost money at the end of the year.

In these cases, the expat doesn’t file a return and doesn’t receive any of the letters the IRS sends to his last known domestic address. Then the IRS computers take the sale data and create a wildly inaccurate Substitute for Return and a massive tax bill.

A few years pass and the expat mails in his US passport for renewal. Instead of getting a new passport back, he receives a letter saying is passport renewal is rejected and that he must resolve his tax debt in full before he applies again.

As I said above, 362,000 Americans have had their passports frozen and renewals rejected. So far, we’ve only seen renewal rejections. God help us expats when the IRS begins to revoke passports to force us home.

Per the IRS website, If you meet one of the following criteria, your passport won’t be revoked nor your passport renewal denied:

  • Being paid timely with an IRS-approved installment agreement
  • Being paid timely with an offer in compromise accepted by the IRS, or a settlement agreement entered with the Justice Department
  • For which a collection due process hearing is timely requested regarding a levy to collect the debt
  • For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made

Additionally, a passport won’t be at risk for anyone:

  • Who is in bankruptcy
  • Who is identified by the IRS as a victim of tax-related identity theft
  • Whose account the IRS has determined is currently not collectible due to hardship
  • Who is located within a federally declared disaster area
  • Who has a request pending with the IRS for an installment agreement
  • Who has a pending offer in compromise with the IRS
  • Who has an IRS accepted adjustment that will satisfy the debt in full

What Can You do to Protect Yourself

First, don’t lose your passport! If you owe money to the IRS. You won’t be receiving a new passport until your debt is paid in full. Be very careful with your travel document.

Second, move your investments and IRA accounts out of the United States to prevent them from being used to create an automated tax debt. Form offshore structures to hold accounts and maximize both privacy and asset protection. This also protects the accounts from being seized by the IRS.

Third, file your delinquent returns to get right with the IRS and continue filing each and every year going forward. Be sure to report the structures and accounts I suggested you create in #2 above. Even if your gains are small, all US expats should file their returns to prevent the IRS computers for doing it for them.

Fourth, take steps to protect your status as an expat while you have a valid passport. You can do this by a) securing a residency visa in the country where you live, and/or 2) by purchasing or otherwise acquiring a second passport.

A second passport gives you freedom of movement should you lose your US passport. With a second passport, you can leave the United States and travel to any country that grants you entry without a visa. Thus, the more visa-free countries you have, the more valuable the passport.

For example, you can purchase a passport from a country like Dominica for about $125,000. This will give you visa-free access to 122 countries. This second passport program can be completed in a few months

If you want an EU passport, consider Bulgaria. Purchase just over $1 million in government bonds and receive residency immediately and citizenship in about 18 months. This passport will give you visa-free access to 169 countries and territories.

In contrast, residency allows you to live in a particular country and to “earn” a second passport over a number of years. Once you have permanent residency, you won’t be forced out if you lose your passport. You won’t be able to travel, but you can’t be taken back to the US to pay up… you can negotiate from a stronger position and settle your tax debt from abroad on your terms.

The easiest country for a US citizen to obtain residency is Panama. Invest $20,000 in Panama’s reforestation visa program and get residency. You can apply for citizenship and a passport after you’ve been a resident for 5 years.

Keep in mind that you must have a valid US passport to apply for a second passport, citizenship or residency. Once your US passport has expired or has been revoked, you’re stuck. You will need to take action well in advance to protect your right to travel.

Fifth, the only country you can enter without a passport from the United States is Mexico. Any time you travel to a foreign country by air or sea, you must present a valid passport. So, if you fly into Mexico, you must have a passport.

The only exception is when you drive into Mexico. No passport is required and no checks are performed. Then, once you’re in Mexico, you can take a domestic flight to any city in the country using only your valid ID (such as a US driver’s license).

So, anyone who loses their passport can travel throughout Mexico so long as they enter at a land crossing.

The above on Mexico is based on years of personal experience and not a statement of the law. You should have a passport with you, valid or otherwise, but, once you’re in, you can travel throughout the country on your driver’s license.

I hope you’ve found this article to be helpful. For more information on a second residency or second passport, or to be connected with an expat tax expert, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

The IRS will end the Offshore Voluntary Disclosure Program

The IRS will end the Offshore Voluntary Disclosure Program

The IRS will end the Offshore Voluntary Disclosure Program on September 28, 2018. If you haven’t come forward by that time, you’re out of luck. In fact, the IRS has already begun to ramp down the 2014 Offshore Voluntary Disclosure Program and it’s becoming more difficult to get cases through.

From the IRS website, “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

And the Offshore Voluntary Disclosure Program has been a real cash cow for the Service. Since 2009, more than 56,000 Americans have used the program, paying $11.1 billion in back taxes, interest and penalties to keep the IRS from pressing criminal charges.

Of this number, about 18,000 people came forward in 2011. The number of taxpayers using the Offshore Voluntary Disclosure Program has steadily declined with only 600 applications in 2017.

What I call the Mini Offshore Voluntary Disclosure Program brought in another 65,000 Americans living abroad. Properly termed the Streamlined Filing Compliance Program was focused on American expats. Those who might not have known of their US filing obligations and want to get back into the US system.

It appears that most Americans have fallen in line and paid over to Caesar what he claims as his. This, and Foreign Account Tax Compliance Act (FATCA) have made the Offshore Voluntary Disclosure Program obsolete. The government has taken all it can from Americans and is now looking to new sources.

The Offshore Voluntary Disclosure Program, like the attack on crypto traders, was based on fear. The US IRS charged a few people in each big city and each state with crimes for having an unreported account. These criminal prosecutions got the Service all the free press they wanted and, as a result, thousands of people came forward voluntarily.

The Offshore Voluntary Disclosure Program was the most efficient and cost-effective marketing campaign in history. And it seems that the IRS is going to deploy the same army against crypto traders in 2018.

See Top two max privacy options to plant your flag offshore

The bottom line is, if you have an unreported offshore bank account or undisclosed assets, you must file for the Offshore Voluntary Disclosure Program now. Time’s up… no more delay and no more debate. It’s time to come clean or accept the risks.

From the IRS website: “Complete offshore voluntary disclosures conforming to the requirements of 2014 OVDP FAQ 24 must be received or postmarked by September 28, 2018, and may not be partial, incomplete, or placeholder submissions. Practitioners and taxpayers must ensure complete submissions by the deadline to request to participate in the 2014 OVDP.”

Note that, US expats and citizens living abroad should probably use the Streamlined Program and not the Offshore Voluntary Disclosure Program. This article considers ONLY the Offshore Voluntary Disclosure Program.

The purpose of the Offshore Voluntary Disclosure Program is to allow US resident taxpayers to come forward, report their foreign accounts, avoid criminal penalties, and reduce civil fines. Those who come forward will pay the tax plus interest on unreported foreign income.

In addition, they’ll pay an accuracy penalty of 20% and a 27.5% offshore penalty. See IRS FAQ 8 for a detailed calculation. In the example, coming forward cost the taxpayer $553,000 vs being liable for well over $4 million had the IRS been forced to track him down.

These taxes and penalties are calculated on the last 8 tax years for which the filing date of the return has passed. For example, if you were to file an OVDP in July 2018, you would amend and pay taxes for 2017, 2016, 2015, 2014, 2013, 2012, 2011, and 2010.

This is to say, you are to amend your personal income tax returns for these years. You will add on to the return any foreign income, such as interest, rental, business, etc. You will also add on any missing foreign entity forms, such as the Form 5471 and 3520. Finally, you will prepare an FBAR form reporting ALL foreign accounts.

Once all of this is ready, your tax preparer and a representative will prepare an OVDP application that includes a letter of explanation of the facts and circumstances of your situation. Again, all of this must be mailed by September 28, 2018.

I hope you’ve found this article on the ending of the Offshore Voluntary Disclosure Program to be helpful. For more information and to be introduced to an expert who can assist you with an OVDP or Streamlined Program, please contact us at info@premieroffshore.com or call us at (619) 483-1708  for a confidential consultation.

Where can I travel without a passport?

Where can I travel without a passport?

The US IRS will begin certifying tax debts on January 22, 2018. If you have a “seriously delinquent” tax debt, your passport can be revoked. Likewise, the government can refuse to renew your passport if you owe more than $50,000. Here’s where you can travel without a passport after it’s been revoked by the IRS.

I’ve been writing about this since December 2015, and it’s finally come to pass. The IRS will begin targeting American expats who haven’t paid their taxes in the next few days. Once your passport is gone, your travel options will be greatly reduced.

Before I get to where you can travel without a passport, let’s consider the situation for a minute.

I suggest that this bill targets Americans living abroad because, unless you have a second passport in hand, the loss of your US passport will force you back to the United States to deal with the IRS. For most Americans living in the US, the loss of their “travel privileges” is of little concern.  The ones who will be hit the hardest will be Americans living, working, and doing business abroad.

This is especially true for expats who don’t have permanent residency in a foreign country. If you’re traveling as a tourist, you’ll be forced back to the United States in a few days or months. If you’re a temporary resident, you’ll be required to return and account to the IRS when your temporary status expires. You won’t be able to apply for permanent residency status if your US passport has been revoked.

If you have a permanent residency visa, you should be able to remain in your country of residency. You won’t be able to travel or leave your country of residence without a valid passport. However, the IRS can’t easily force you home unless you lose your permanent visa status.

If you think you’ll have a tax issue in the future, or can keep the IRS at bay with an Offer in Compromise, you might apply for residency in a country like Panama. All you need to qualify is an investment of in this country’s friendly nations reforestation visa program. While there are many countries where you can get residency, Panama is the lowest cost quality jurisdiction for those from a friendly nation.

Of course, the question of where you can travel without a passport becomes mute if you purchase a second passport. So long as you have a valid travel document from a country like St. Lucia, the IRS can’t force you back by revoking your US passport.

But, once your US passport has been revoked, and you’re back in the United States, where you can travel without a passport? The following is based on a decade of experience. This article is not a statement of the law, but rather how things work at the border.

First, you won’t be able to fly to any country without a passport. No airline will risk allowing you to fly if you don’t have a passport. Remember that the airline is responsible for returning you to your home country if you’re denied entry.

So, that means you have only two options of where to travel without a passport. You can drive to Canada or Mexico. Because Canada can be quite picky about whom they let in, the safest port of entry is Mexico.

If you travel within the Border Zone (usually up to 20 kilometers south of the US – Mexico Border) or the Free Trade Zone (including the Baja California Peninsula and the Sonora Free Trade Zone) no passport will be required by Mexico. However, if you wish to pass these zones, you’ll need a passport and, if you’re driving a US car, your auto will need a permit.

The maximum period of time you’re supposed to stay in Mexico without a formal visa is six months. However, when you arrive by land, there’s no entry stamp and no way for the government to know how long you’ve been in the country. In my experience, so long as you don’t cause any trouble, the Mexican government won’t bother you.

In order to return to the United States, you’ll need a valid US ID and your birth certificate. While many websites say you need a US passport, including official government sites, I’ve asked immigration officers and they say you can pass with a birth certificate and photo ID. The last time I inquired was 2 days ago, so this is recent information.

By the way, I’m assuming that the US IRS will revoke all travel documents if you owe more than $50,000. This means the loss of your US passport, your US passport card, and your SENTRI card. US passport cards and SENTRI cards are only valid at land crossings (Mexico and Canada).

I haven’t seen any statements by the IRS or immigration on passport and SENTRI cards. It’s possible they would remain in effect if you lost your passport.

With that said, I don’t see any practical reason a US person couldn’t drive from San Diego to Tijuana and live in Baja indefinitely without a passport. Your chances of having a problem with Mexican authorities is low and you should be able to return to the US occasionally without a passport.

Where you’ll have issues is opening a local bank account and getting an apartment lease. It would be best if you can get these done before losing your US passport.

With all of that said, the best place you can travel without a passport is Northern Mexico. Again, this is 20 kilometers south of the US – Mexico Border and Baja California. All of my experience has been in Baja, from Mexicali to Tijuana and Playas to Ensenada. In 10 years of travel in Northern Mexico, I’ve never once been asked for a passport.

I hope you’ve found this article on where you can travel without a passport to be helpful. For information on setting up an offshore structure while you still have your passport, or with Panama residency or purchasing a second passport, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

IRS Offshore Voluntary Disclosure Program

IRS Offshore Voluntary Disclosure Program for 2017

The IRS Offshore Voluntary Disclosure Program for 2017 offers taxpayers with undisclosed offshore accounts the ability to come forward voluntarily, file their returns, disclose their assets, pay the resulting taxes and penalties, and receive a clean slate. This article covers amendments to the Offshore Voluntary Disclosure Program through February 9, 2017.

As of 2017, the IRS Offshore Voluntary Disclosure Program has collected about $8 billion in taxes and penalties from US persons with undisclosed offshore accounts. The last official number reported by the Service was $6.5 billion taken from 45,000 taxpayers as of June 2014. Unofficial estimates put it at $8 billion today.

The OVDP first came out in 2009 when the IRS was putting pressure on the Swiss bank UBS to turn over account records of US citizens. The IRS claimed that UBS was illegally helping US citizens to hide money from the tax man.

When the dust settled, UBS bowed to the US government. The bank agreed on February 18, 2009 to pay a fine of US$780 million to the U.S. government. This ransom payment broke the back of Swiss privacy and lead to the situation we have today where US persons have zero right to privacy in their financial dealings.

The IRS Offshore Voluntary Disclosure Program allows taxpayers with undisclosed accounts to avoid criminal prosecution and to “come into the fold” as it were. The OVDP is designed for US persons who voluntarily report their foreign accounts and avoid the draconian penalties the IRS will impose if they catch you.

  • A “US person” is any US citizen, green card holder, and resident of the US. The definition can include anyone who spends more than 183 days a year in the US and doesn’t usually include non-resident aliens, but exceptions apply.
  • For a detailed list of penalties and charges you can face if you’re caught with an offshore account, and don’t voluntarily come forward, see FAQs 5 and 6 here.

Before I get into the terms of the IRS Offshore Voluntary Disclosure Program for 2017, note that this program is sometimes referred to the 2012 OVDP or 2014 OVDI. The last major changes to the program came in July 1, 2014. There have been several comments and clarifications from that date to February 9, 2017. This article was written in May of 2017.

The following applies to US persons with undisclosed foreign bank accounts. You were required to report any bank or brokerage account(s) outside of the US with more than $10,000.

This is the combined balance of all your foreign accounts. For example, if you had $6,000 in an account in France and $6,000 in an account in Switzerland, your combined balance was $12,000 and you had a filing obligation.

This filing requirement is based on the highest balance in the foreign account for any one day of the year. It’s not your average balance during the year or year-end balance.  

Let’s say you were buying an apartment in Belize for $200,000 in 2015. You opened a bank account on the island and transferred the purchase money to that account. One day later you wired the $200,000 out of your Belize account and into an escrow account. You had a reporting requirement for 2015 because you had more than $10,000 offshore for that one day.

If you’d sent the money directly from a US account into an escrow account, you would not have a US reporting obligation. This is because an escrow account is not in your name and not under your control.

That is to say, you are required to report any offshore account in your name or under your control. Having a nominee on the account doesn’t eliminate the filing requirement because you still maintain control.

The focus of the IRS Offshore Voluntary Disclosure Program has been offshore bank accounts. There are many other filing deficiencies can be cured through the OVDP. For example, you should be filing Form 5471 if you hold shares in an offshore company. Then there’s Forms 3520 and 3520-A for foreign trust and Form 8938, Statement of Foreign Financial Assets.

Bottom line, if you had an interest in a foreign bank account or structure, you probably had a US filing requirement and should consider the IRS OVDP.

IRS Offshore Voluntary Disclosure Program for 2017 Settlement Terms

There are two flavors of the IRS OVDP, the Streamlined Offshore Voluntary Disclosure Program and the Traditional Offshore Voluntary Disclosure Program. Clients with a low risk of criminal prosecution, and a valid cause for their failure to report and pay, will usually select the streamline option.

Those who are coming forward after their foreign bank entered into an agreement with the IRS, or who’se financial advisor made a deal to turn over their client list, will need to go with the more expensive traditional program. Likewise, those with no valid cause for the account, or who took steps to hide the account from the IRS, should go with the traditional program.

Traditional Offshore Voluntary Disclosure Program

The penalties under the traditional OVDP are as follows:

  1. A 20-percent accuracy-related penalty on the tax due with the filing of your amended returns for all years. If no tax is due with the filing, then no accuracy penalty will apply;
  2. Pay failure-to-file and failure-to-pay penalties, if applicable; and
  3. Pay, in lieu of all other penalties 27.5% of the highest aggregate value of your foreign assets during the period covered by the voluntary disclosure.

If your bank is under investigation, a 50% penalty might apply rather than the 27.5% above.  Remember that the purpose of the program is to convince Americans to come forward voluntarily. If the IRS believes they’d have caught you eventually without the disclosure, they’re going to hit you hard.

The 27.5% penalty applies to all foreign assets which you failed to disclose. If all you had offshore was a bank account, the penalty is based on the highest value of the account during the OVDI period.

In my example above, a client had an offshore bank account that held $200,000 for only one day. In that case, the standard OVDI penalty is 27.5% of $200,000, or $55,000.

If you have other reportable assets, such as foreign real estate, an offshore trust, and a brokerage account, the penalty can apply to the highest value of these assets combined plus the highest value of your offshore bank account.

The OVDP penalty is often assessed on the highest value from a few years back because that’s when you were making money offshore. Since that high-water mark, the brokerage account may lost money, the bank accounts depleted, and the real estate has gone to foreclosure… I even had a client that had all his money stolen by an offshore scammer. None of these losses matter. The penalty is on the highest value and later losses are disregarded.

See FAQ 8 and 31 through 41 on the IRS website for more details on how to calculate the standard penalty.

Streamlined Offshore Voluntary Disclosure Program

The streamlined filing compliance program is available to those who can certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. You must state, and should be able to prove, that you didn’t intend to use the offshore account to avoid paying your taxes.

That is to say, you must state under penalty of perjury that your conduct was not willful. That the failure to report all income, pay all tax and submit all required information returns, including FBARs was due to non-willful conduct.

Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

The risk with the streamlined program is that the IRS doesn’t buy your claim of non-willfulness. If they have evidence that you intended to hide money from the Service, or that you lied on the streamlined application, they will come after you with guns blazing.

The reduced penalties under the streamlined OVDP are as follows:

For US persons living in the United States:

  1. File original or amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) for the last years properly reporting your offshore accounts, assets, and income,
  2. File original or amended FBARs for the last 6 years, and
  3. Pay the tax, interest, and a miscellaneous 5% penalty with the filing of your OVIP.

The streamlined penalty for US residents is equal to 5% of the highest aggregate balance/value of your reportable foreign financial assets. For this purpose, the highest aggregate balance/value is the highest year-end balance… which might not be the highest balance for the year.

In our example above, you had $200,000 in an offshore account for one day. Assuming that wasn’t December 31, you’re streamlined penalty won’t include that deposit.

A foreign financial asset is any asset that should have been reported on the FBAR (FinCEN Form 114) or Form 8938. The most common examples of foreign financial assets include:

  • Bank and brokerage accounts held at foreign financial institutions;
  • Bank and brokerage accounts held at a foreign branch of a U.S. financial institution;
  • foreign stock or securities not held in a financial account;
  • foreign mutual funds; and
  • foreign hedge funds and foreign private equity funds.

Note that the streamlined OVDP penalty applies to foreign financial assets while the traditional OVDP applies to all foreign assets.

If you’re eligible for the Streamlined Domestic Offshore Voluntary Disclosure Program, you can avoid  accuracy-related penalties, information return penalties, and FBAR penalties. In most cases, the 5% miscellaneous penalty will be the only penalty assessed.

For US persons living abroad:

If both you and your spouse are non-residents for US tax purposes, you might be eligible for the zero penalty version of the streamlined program. If you’re living abroad, and otherwise qualify for the Streamlined Foreign Offshore Voluntary Disclosure Program, the IRS will allow you to file or amend your returns without the 5% penalty.

Keep in mind that your failure to file or pay taxes must have been non-willful. This criteria is the same for both domestic and foreign filers.

You’re a US citizen “living abroad” for the streamlined OVDP if you were out of the United States for 330 days for one of the last three tax years. If you’re OVDP filing covers tax years 2014, 2015 and 2016 (it is now 2017), then you must have been out of the country for 330 days during one of those years.

If you qualify for the foreign streamlined OVDP, you must submit your last 3 years of returns, 6 years of FBARs, and pay any tax and interest at the time of filing.

The purpose of the foreign streamlined program is to allow American’s living abroad to get back into the system without a penalty. The IRS has determined that, on balance, US persons who are out of the US for 330 days, and thus have few ties to this country, are the most innocent when it comes to their failure to file and pay taxes.

And, when you take the Foreign Earned Income Exclusion and the Foreign Tax Credit into account, most American’s living abroad pay little or no US taxes on their income. In that case, you will pay little to nothing with your foreign streamlined OVDP.

A US citizen who is a resident of a foreign country, or is out of the US for 330 days during any 365 day period, qualifies for the Foreign Earned Income Exclusion. The FEIE allows you to earn about $100,000 in salary or business income free of Federal income taxes. For more on the FEIE, see: Foreign Earned Income Exclusion for 2017

You also get to deduct any foreign taxes paid on your US returns, even when those returns are filed as part of an OVDP. You essentially get a dollar for dollar credit against any taxes paid on your US return.

So, if you’re living in a country with a tax rate equal to or higher than the United States, you shouldn’t owe any US tax on your foreign income. In that case, you’ll pay nothing with your foreign streamlined OVDP.

If you’re living in a zero or no tax country, or aren’t required to pay local tax to your country of residence, then you’ll pay some US tax with your OVDP. If your salary exceeded the FEIE, you will owe US tax on the excess. If you have capital gains, they’ll will be taxable when you file or amend your US returns.


The IRS Offshore Voluntary Disclosure Program for 2017 allows US persons to come out from the cold and get back into the good graces of the US government. No matter the reason for your failure to file, and I’ve heard them all, the OVDP is your best path forward

I hope you’ve found this article on the OVDP for 2017 to be helpful. For more information, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to file a streamlined or traditional Offshore Voluntary Disclosure and negotiate the best settlement available.

Foreign Earned Income Exclusion for 2017

Foreign Earned Income Exclusion for 2017

The Foreign Earned Income Exclusion for 2017 has finally been released and we expats get an increase of $800 this year. The U.S. government has increased the Foreign Earned Income Exclusion for 2017 to $102,100, up from $101,300 in 2016.  

You can attribute this big time increase of the Foreign Earned Income Exclusion for 2017 to the “robust” U.S. economy. That’s because the FEIE is indexed annually for inflation. The official inflation rate for 2016 was 1.4% and it’s expected to between 1.5% to 1.6% for 2017.

Note that this article is about the 2017 FEIE. For the 2018 Exclusion, see: Foreign Earned Income Exclusion for 2018

The Foreign Earned Income Exclusion for 2017 is the amount of salary or business income you can exclude from your United States taxes while living abroad. If you qualify for the FEIE for  2017, and you earn $102,100 or less in wages, you will pay zero Federal income taxes.

To qualify for the FEIE, you must be out of the United States for 330 days during any 12 month period, or a legal resident of a foreign country for a full calendar year. The 330 day test is simple math… be out of the U.S. and you’re golden. It doesn’t matter where you are in the world, so long as you’re not in the U.S.

For more on the 330 day test, see: Changes to the FEIE Physical Presence Test Travel Days

To apply the FEIE for 2017 over two calendar years, see: How to Prorate the Foreign Earned Income Exclusion

The residency test is more complex and based on your intentions. You must move to a foreign country for the “foreseeable future.” This new country should be your home and your home base. When you travel, it’s where you return too. It’s where you lay down roots. It’s where you file taxes and where you’re a legal resident (with a residency permit).

  • You should be filing taxes in your new home. It doesn’t matter if you’re paying taxes… just that you are following their laws as a legal resident. If your country of residence doesn’t tax your income earned abroad or in an offshore corporation, all the better.

In most cases, you will use the 330 day test in your first year abroad. That will give you time to secure residency, find your home base, and do all the things necessary to break ties with the U.S.  Beginning January 1 of year two, you will file for the Foreign Earned Income Exclusion using the residency test.

The reason you want to use the residency test when eligible is that it will allow you to spend more time in the United States. Under the 330 day test, you can spend all of 36 days a year in the land of the free. If you qualify for the residency test under the Foreign Earned Income Exclusion for 2017, you can spend 4 or 5 months a year in America.

Someone with no home base, and no residency visa, will never qualify under the residency test. A perpetual traveler will need to use the 330 day test. Likewise, someone on temporary assignment for a year or two, who intends to return to the U.S. when their job runs out, will need to use the 330 day test.

Just remember than any income earned in the USA is taxable here. The FEIE doesn’t apply to U.S. source income. If a U.S. citizen works for 10 days in the U.S., the income from those days is U.S. source and Uncle Sam wants his cut.

The FEIE for 2017 applies to married persons individually. A Husband and Wife working in their own corporation, or drawing salaries from a foreign company, can earn $204,200 combined this year and pay zero Federal income tax.

If you earn more than $102,100, you’ll pay U.S. income taxes on the excess. For example, if you earn $202,100, in salary, you will pay U.S. Federal income tax on $100,000 at 28% to 33%.

Note that your expat tax bracket begins at 18%. This is because the full $202,100 counts towards the bracket. Thus, you are paying a rate on your last $100,000 as if you had earned $202,100 in wages, not just $100,000.

If you pay tax in the country where you work, your U.S. tax on this $100,000 over and above the Foreign Earned Income Exclusion for 2017 will be reduced. Every dollar you pay in foreign income tax should reduce your U.S. rate by one dollar.

  • A dollar for dollar credit is the theory behind the foreign tax credit. You will see some variance on your return when you account for deductions, credits, etc.

Another tool for high earners who are self employed is to hold earnings over the Foreign Earned Income Exclusion for 2017 amount in their corporation. Pay yourself a salary of $102,100 and keep the rest in the corporation as retained earnings. For more on this, see: How to Manage Retained Earnings in an Offshore Corporation.

Be aware that the Foreign Earned Income Exclusion doesn’t apply to income that’s not  “earned.” So, the FEIE doesn’t cover passive income like rents, royalties, dividends, or capital gains. Income which is earned is money made from paid work / labor.

For more on tax planning for foreign real estate, see: US Tax Breaks for Offshore Real Estate

Most clients who contact us about the FEIE are business owners or self employed. They want to form an offshore corporation to retain earnings, maximize the value of the FEIE, and eliminate Self Employment tax.

Note that the Foreign Earned Income Exclusion does not apply to Self Employment tax, only income tax. So, a self employed person living abroad and qualifying for the Exclusion will still pay 15% in SE tax. That means about $15,000 on your salary of $102,100 for FICA, Medicare, Obamacare, etc.

If you don’t want to contribute to Social Security, you can opt out of Self Employment tax by forming an offshore corporation. Incorporate in a country that won’t tax your income, get your clients to pay that company, draw a salary from your foreign corporation reported on U.S. Form 2555, and you’ve eliminated U.S. social taxes.

For more on the tax benefits of living abroad, see: Tax Benefits of Going Offshore

For more on setting up a business offshore, see: Benefits of an Offshore Company

If you’re reading this article on the Foreign Earned Income Exclusion for 2017 and planning to set up a large business offshore, you might consider Puerto Rico. If $102,100 is a small portion of your net profits, think Puerto Rico. If your take home is closer to $1 million than $100,000, think Puerto Rico. If you have at least 5 employees, Puerto Rico might be for you.

The Puerto Rico tax deal, referred to as Act 20, is the reverse of the Foreign Earned Income Exclusion. With Puerto Rico, you pay U.S. tax rates on your first $100,000. Then you pay 4% profits over this amount and distribute those profits to yourself as a tax free dividend.

The Puerto Rico tax deal requires you live on the island for 183 days or more, significantly less than the 330 days required by the FEIE. If your net business income is well over the FEIE of $102,100, consider Puerto Rico.

The catch in Puerto Rico is that you must hire 5 employees on the island. You and your spouse can be 2 of those 5, and then you need 3 more. When setting up offshore, there’s no minimum number of employees required.

For a comparison of the Puerto Rico deal with the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion

For more on who qualifies as a Puerto Rico employee, see: Who is a Resident of Puerto Rico for US Tax Purposes

To read more about Puerto Rico and the Foreign Earned Income Exclusion, see: How to Maximize the Tax Benefits of Puerto Rico

For more on setting up a one man or one woman business offshore, see: Move Your Internet Business to Cayman Islands Tax Free

The bottom line is that the FEIE is great for those earning $100,000 from a business (or $200,000 of both spouses are working). If you are earning well over this threshold, and you can benefit from 5 employees, take a look at Puerto Rico.

I hope you’ve found this article on the Foreign Earned Income Exclusion for 2017 to be helpful. For more information on taking your business offshore, to Puerto Rico, or for a referral to a U.S. tax preparer, please contact me at info@premieroffshore.com or call (619) 483-1708.

IRS can take your passport

Expats, the IRS is Coming for your Passports

Back in December I told you the IRS has the power to revoke your United States passport for past due debts. Now I’m telling you that the IRS has begun its attack on American expats… that the battle for your passport on… that the IRS has set the field and the first shots are about to be fired.

Here’s my original article: Warning: The IRS Can Now Revoke Your Passport (posted December 9, 2015)

To read the bill that takes away your freedom of movement, see: H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act (signed by Obama on December 5, 2015)

As you read my comments below, remember that a United States passport is a privilege, not a right. Your government can take it away from you for any reason it sees fit.

The IRS has begun working with US Embassies and Consulates around the world to deny and revoke passports of Americans abroad who have not filed or owe the IRS.  If you are living outside of the United States, the IRS is coming for your passport.

Per this post from the The United States Embassy in Brazil, as of October 1, 2016, anyone attempting to renew their passport through the Embassy will be required to provide a Social Security number. That number will be used to review your IRS records before approving a passport renewal.

This means that, anyone who owes more than $50,000 to the IRS will be denied a passport. If you’re caught by local authorities without a passport, or overstaying your visa, you will be removed from the country and returned to the United States to face the collector.

It also means that anyone who has not filed their tax returns will likely have their passport renewal denied. Here’s how they will take your passport for not filing:

The law says your passport can be revoked or denied if you owe more than $50,000. When the IRS finds out that you are abroad and have not filed, they will prepare a Substitute for Return for you. They’ll estimate your income and assets and all manner of penalties, such as FBAR and offshore financial statement, and generally guesstimate a tax bill for you.

The resulting “substitute” balance due will certainly exceed $50,000. Thus, the Service will withhold or revoke your US passport for failure to file after inventing that phantom tax bill. You will be left with one option – return to the United States and negotiate a settlement.

It should be clear to everyone that the US IRS is waging a war on expats. The government wants to limit your freedom of movement and your right to live, work, invest, and hold money where you see fit.

Assuming you’re not the type to bow down, bend over, and be herded back to the United States like a lamb, what can you do to protect your right of self determination? What can you do if your United States Passport is revoked by the IRS?

You must have a passport to travel from place to place and live in any country outside of the United States. Also, a valid passport is often the only acceptable form of identification. Without it, you won’t be allowed to open bank accounts, transact business or execute wire transfers.

The best way to protect yourself from your own government is to buy a second passport. Many small nations sell citizenship and second passports. If you have a second passport, you have a safety net regardless of what happens with your US passport.

Here are a few of the best second passport options for Americans. For a more complete list, see: 10 Best Second Passports and Citizenship by Investment Programs For 2016

As you can see, a second passport is expensive. The next best option is to become a permanent resident of your country of residence. For example, if you’re living in Panama, you can become a permanent resident by investing $20,000 or setting up a business in the country.

Becoming a permanent resident will allow you to remain in the country no matter what happens with your US passport. But, a few words of warning:

  • You won’t be able to travel outside of your country of residence without a passport.
  • You won’t be able to renew your residency (if applicable) without a valid passport.
  • You must complete the residency process before your US passport is revoked or expires.

Buying a second passport can be completed in about 90 days once your documents are submitted. Becoming a permanent resident is usually completed in stages, often requiring a 2 year period as a temporary resident.

I also note that both of these processes will require a clean report from the FBI. Click here for more on how to request this report. Typical processing time is 60 days.   

Considering how aggressive the IRS has become in the last year, and the time it takes to process residency or a second passport, I suggest anyone concerned with the IRS, or the state of our government, should take action immediately. Once your US passport is gone, it’s too late to protect yourself or your family.

I hope you’ve found this article on the IRS coming for your passport to be helpful. For more on how to buy a second passport, or obtain residency in Panama or Mexico, please contact me at info@premieroffshore.com. All consultations are confidential and free.

retained earnings

Watch Where You Invest Those Retained Earnings – IRS Tracking Luxury Home Purchases from Offshore Companies

According to the N.Y. Times, The IRS has begun tracking homes bought through offshore companies and shell corporations in the United States. If you’ve setup an offshore structure, and used your retained earnings to buy real estate in the United States, you’re probably a target of the IRS.

Even if your offshore company is tax compliant, you still may be in trouble with the tax man for using those retained earnings for your personal benefit. You may be living in the property at below market rent or taking the rents as personal income.

If you’ve managed to avoid the worst of the pitfalls, investing retained earnings in the United States might have converted them to taxable distributions to the parent company. For more information, see: How to Manage Retained Earnings in an Offshore Corporation

The bottom line is that offshore retained earnings are best held offshore. Unless you have a tax plan and written opinion from a reputable firm, leave the money alone and allow it to build up inside your operating company.

And now, here’s the rest of the story:

As I said above, the IRS is targeting luxury home sales involving offshore companies. Because buying US real estate is a common, if risky, use of retained earnings, this investigation is likely to net many offshore entrepreneurs.

The first stage of this investigation is now complete. It was focused on Miami and Manhattan, where over 25% of the all-cash luxury home purchases made using offshore companies or shell corporations were flagged as suspicious.

Today, officials said they would expand the program to areas across the country. The IRS will target luxury real estate purchases made with cash in all five boroughs of New York City, counties north of Miami, Los Angeles County, San Diego County, the three counties around San Francisco, and the county that includes San Antonio.

The IRS says that the examination, known as a geographic targeting order, is part of a broad effort by the federal government to crack down on “money laundering and secretive offshore companies.” As we know, “money laundering” is basically code for “tax cheats.” For every one drug kingpin caught in their net, they’ll land 1,000 tax cases.

Cases will be selected based on the purchase price of the property. Only all cash sales will be targeted in this round of audits. The dollar values involved are as follows:

  • $500,000 in and around San Antonio;
  • $1 million in Florida;
  • $2 million in California;
  • $3 million in Manhattan; and
  • $1.5 million in the other boroughs of New York City.

You might be thinking, that the IRS doesn’t have data on every real estate purchase in the United States. How the heck are they going to audit every single transaction over these amounts.

Never fear, the IRS thought of that. All they needed to do is issue an order to every title insurance company in the United States. Basically, they’ve drafted title insurance agents into the IRS army (unpaid, of course), to search through their records and select those who should be investigated.

  • Title insurance companies are involved in just about every residential and commercial real estate transaction in the United States.

And these insurance agents aren’t just providing information on the home in question. They’re identifying the escrow agent, the US and offshore banks involved, all paperwork from the offshore company, etc.

Once the IRS has the bank account information, they’ll summon your account records. This will enable them to chase down all inbound and outbound wires.

Here’s the bottom line: investing retained earnings into the United States opens up a pandora’s box of trouble. I’ve been telling clients this for years and now it’s come to fruition.

If you have an active business offshore, keep your retained earnings offshore. Don’t make you and your cash a target for the IRS. Even if you’re 120% tax compliant, avoid the audit, avoid the battle, and protect your hard work from the Service.

I hope you’ve found this article on the IRS’s targeting of offshore retained earnings to be helpful. If you have questions on structuring a business offshore, you can reach me at info@premieroffshore.com for a confidential consultation.

Pre-Immigration Tax Planning

Pre-Immigration US Tax Planning for Future US Residents & Citizens

If you’re moving the the United States, get ready for our crazy tax system. Most importantly, if you will become a US resident, be prepared for US tax on your worldwide income. You need to do your pre-immigration US tax planning before you arrive to minimize these taxes.

Let me begin by defining what I mean by a US “resident.” Then I’ll review your pre-immigration tax planning options and what you need to do NOW before landing in the United States.

The United States taxes its citizens and it’s green card holders on their worldwide income. It doesn’t matter where you live or where your business is located. So long as you hold a blue passport or a green card, you will pay US tax any income you earn.

Likewise, the US taxes its residents on their worldwide income. A US resident is anyone who spends 183 days or more in the US in a calendar year. If you spend more than 183 days in one year, and then fewer days the next year, you might be a US resident for both years because a weighted average is used to determine residency.

  • I won’t bore you with the details of how to calculate the average. Suffice it to say, if you spend significant time in the United States, Uncle Sam wants his cut.

A US tax resident is ANYONE who spends 183 days a year in the country. Even if you are here on a tourist visa, or illegally, you are a tax resident and expected to pay US tax on your worldwide income. Your legal or immigration status is separate from your tax status.

US Pre-Immigration Tax Planning Techniques

If you plan to become a US resident, green card holder or citizen, you need pre-immigration tax planning before you move to the America. Some of these strategies require you to plan years in advance. So, if you are working towards residency in the United States, stop and think about taxes NOW.

Minimizing US Tax on the Sale of a Foreign Business

When you sell a foreign business after you become a US resident, you pay US tax on the gain from that sale. This means you’ll pay US tax on all of the appreciation and value that has accrued in your business over the years.

For example, let’s say you started a business in Hong Kong 10 years ago. You invested $100,000 and now the business is worth $1 million. You move to the US and sell this Hong Kong company the following month. The IRS expects you to pay US capital gains tax on $900,000.

Obviously, the simple way to avoid this tax is to sell your business before you move to the United States. I suggest you sell the business and then wait a month or two before traveling to the United States to make sure there are no issues.

But, what if you’re not ready to sell today? What if you want to move to the United States for a year or two and then sell? Serious planning and US filings are required to minimize your US tax obligations.

You can basically sell the business to yourself by making certain elections in the United States for your Hong Kong business. By converting the business from a corporation to a partnership or disregarded entity, you are selling it to yourself for US tax purposes. Do this before moving to the US, and you will have no US taxes due on the phantom sale.

Then, when you sell the company again in one or two years, you will only pay US tax on the appreciation in value from the day you sold it to yourself. This is called Stepping Up Basis. Here’s an example:

You plan to move to the United States on January 15, 2017. So, you file forms with the US IRS to treat your Hong Kong company as a partnership on December 15, 2016.  This triggers a sale of the assets to you, but no tax is due in the US because you are not a US resident for tax purposes. The value of the business on December 15, 2016 is $900,000.

Then, on December 15, 2018, you sell the business for $1 million dollars to a third party. Because of the pre-immigration tax planning you did along the way, you will only pay US tax on the $100,000 of appreciation that accrued from December 15, 2016 to December 15, 2018.

Another business income tax planning tool is to recognize as much income as possible before you move to the United States. You pay yourself as much in salary and bonuses as possible to deplete the value of the Hong Kong company before you move to the United States.

Note that salary from a foreign corporation will be taxed at about 35% Federal plus your State (maybe 12%). So, taking as much in salary before moving to the US can save you big time. Even if it requires borrowing money from banks or other sources, accelerating your income can be beneficial.

Offshore Trusts in Pre-Immigration Tax Planning

When you move to the United States, you need to worry about business tax, personal income tax (salary and capital gains) and death taxes. High net-worth residents pay a tax on the value of their worldwide assets when they pass away.

  • United States death tax applies to residents, green card holders and citizens with assets of more than $5.45 in 2016 and the tax rate is 35% to 40%.

You can minimize or eliminate the US estate tax by giving away your assets before you move to the United States. Most transfers after you become a resident will be subject to US gift tax, which is 40% plus your state.

This form of pre-immigration tax planning can also reduce your US personal and business income taxes. If you give your assets to family who will not be residents of the United States, America can’t tax those assets when sold or as business income is generated.

Most clients want to maintain control over their assets while they are alive. They don’t want to pay US income or estate taxes, but they do want to manage the assets or business for the benefit of their heirs.

This is where offshore trusts come in to pre-immigration tax planning.

When you setup an offshore trust to manage your assets, they’re removed from your US estate and the death tax doesn’t apply. Also, gains or income from these assets can be removed from your US income tax if you plan ahead.

If you set up and fund an offshore trust at least 5 years before becoming a US resident, the income generated in that trust will not be taxable to you in the United States.

Thus, if you are thinking about becoming a US resident, or moving to the United States is a possibility (even a remote possibility), you would do well to create an offshore trust and engage in some pre-immigration tax planning now.

If you can’t meet the 5 year threshold, there are several benefits to creating an offshore trust before moving to the United States. For example, an irrevocable offshore trust can reduce transfer tax, estate / death tax, and protect your assets from creditors. Considering that the United States is the most litigious nation on earth, asset protection is an important part of pre-immigration planning.

I hope that you have found this information on pre-immigration tax planning to be helpful. For more information, and to consult with a US attorney experienced in these matters, please contact me at info@premieroffshore.com

E-2 Treaty Investor Visa

US E-2 Treaty Investor Visa Tax Strategy

Moving to the US on with the E-2 Treaty Investor Visa comes with a very big hidden cost. You are by definition a US tax resident and required to pay US tax on your worldwide income AND report your foreign assets to the US government each year. Here’s how to reduce or eliminate that tax cost for the E-2 Treaty Investor Visa.

First, a few words on the E-2 treaty investor visa. This US residency program allows you to live in the United States so long as you are operating a business that employs a few American citizens. If the business shuts down, you will be asked to leave.

The E-2 treaty investor visa requires two things: 1) you must be from a treaty country, and 2) you must make an investment in the US by starting a business here. For a list of treaty countries, see the US Department of State website. I think you will be surprised with who’s in and who’s out.

The E-2 treaty investor visa is not a path to a green card nor US citizenship. It’s a residency visa that allows you and your family to live in the US while you are working here and employing a few people. Most investors start a business with about $200,000 and hire around 5 employees including the owner (you, the E-2 treaty investor).

The E-2 treaty investor visa doesn’t have a minimum investment amount nor a minimum number of employees. In my experience, businesses that are well funded through break-even with $200,000, and which will add 4 jobs to the economy (5 including the owner) are likely to be approved.

A person in the US on an E-2 treaty investor visa is expected to be running the business on a day to day basis. This is not a program for passive investors. It’s for those who want to start a small business in the US and work in that business each and every day.

  • Passive investors should go with the EB-5 Investor Visa. Here’s a tax strategy article for that program: Coming to America Tax Free with the EB-5 Visa and Puerto Rico. The EB-5 visa gives you a green card and US citizenship within 5 years but requires 10 employees and an investment of $500,000 to $1 million.

The E-2 treaty investor visa is a “temporary” residency visa that needs to be renewed every few years. Basically your case officer will check to see that the business is operating and the you are employing the agreed number of persons.

Because of its temporary status, you should have a plan to return to your home country once the business has run its course. As a practical matter, these companies can operate for decades. So, as long as the business is profitable, or you can keep it going by adding more cash, you can reside in the US. But, during the application process, we need to show a plan to return home.

E-2 Treaty Investor Visa Tax Issues

Because you are operating the business from the United States to qualify for the E-2 visa, all income earned in that corporation is US source income taxed at about 35% Federal plus your State (0% to 12%). This is to be expected when operating from the US.

What’s often not expected is US tax on your worldwide income.

Here’s an example of the E-2 visa tax trap: Let’s say you bought a house in Colombia in 1995 for $100,000. You move to the US in January of 2016 on the E-2 treaty investor visa and sell the home for $1 million in March of 2016 (yes, Colombia has an E-2 visa treaty).

You pay 10% in capital gains tax to Colombia on the sale, which is that country’s standard tax rate. In addition, you report the entire sale on your US tax return for 2016. The US capital gains rate is about 23.5% and you get a tax credit for the 10% paid to Colombia using the Foreign Tax Credit.

As a result, you owe the US Federal government 13.5% x $900,000 gain or $121,500 on the sale of your home in Colombia. If you’re living in a high tax State like New York or California, you’ll pay an additional 10.5% in capital gains. A very expensive tactical error which could have been avoided by selling the home before becoming a US tax resident.

Note: Had the capital gains tax rate in Colombia been 24% rather than 10%, you would owe nothing to the US Federal government and only paid State tax on the gain. That is to say, if the taxes paid in your home country are higher than the US rate, the Foreign Tax Credit will step in and prevent double taxation. ‘

The same tax expense will apply as long as you are in the US on the E-2 treaty investor visa program. All capital gains, interest income, income from businesses operated outside of the US, and income from any source, will be taxed in the US less any foreign taxes paid.

E-2 Treaty Investor Visa Tax Strategy

Careful tax planning is required before the E-2 visa applicant moves to the United States. Once you’re a tax resident, many planning opportunities are closed. For a high net worth individual, the tax costs of moving to the US can far outweigh the costs of starting the business and complying with the requirements of the E-2 visa.

For example, our Colombian could have sold his home before moving to the US and saved a lot of money and reporting hastle. Other possibilities are that he could have gifted his home to a family member or his heirs, sold it to an offshore trust, or otherwise disposed of it before coming to America.

And the same goes for brokerage accounts and other passive investments. There are a variety of offshore trusts, life insurance structures, and tax strategies that will allow you to manage assets for the benefit of your heirs and avoid US capital gains on any sales.

Also, special consideration should be paid to the US death tax. In certain circumstances, an E-2 visa holder is a US resident for income tax purposes but not for estate tax purposes. If someone was to die in that situation, they would be taxed in the US on all of their US assets and allowed only a $60,000 exclusion. US citizens get a $5.2 million estate tax exclusion.

US trusts and other planning tools should be considered to ensure the E-2 visa holder gets the full $5.2 million exclusion. None of us like to talk about death, but it’s an important conversation to have prior to moving into the United States.

As for an active businesses, different rules apply depending on whether the company is controlled by the US resident or whether it’s a joint venture with a nonresident partner. “Control” means ownership or control of more than 50% of the business.

If you, the E-2 visa applicant, sell or transfer half of their foreign business (not the E-2 business) to a family member who will operate it while you are in the US, you may realize significant tax savings in the US. Note that I am referring to an active partner and not a nominee director.

There is one way to enter the US on an E-2 treaty investor visa and pay zero tax to the US government. If you setup your business in the US territory of Puerto Rico, you will pay only 4% in corporate tax on the profits earned from that endeavor.

Next, if you are a resident of Puerto Rico, and spend 183 days a year on the island, you will pay zero capital gains taxes and zero tax on dividends from your Puerto Rico company.

Combine these two tax strategies together and you get a 4% tax rate on business profits and zero tax on passive income, dividends and capital gains. Compared to the 45% rate some Americans in high tax states pay, this is an amazing offer.

And, as a US territory, an E-2 visa from Puerto Rico is identical to an E-2 visa from New York or California (except for the tax rate of course). You’ll have full access to the United States and the right to come and go as you please. Travel between Puerto Rico and the United States is a domestic flight and there’s no immigration checkpoint.

The tax holiday in Puerto Rico for businesses is Act 20. The holiday for personal income and capital gains is Act 22. For more on this, see: How to Maximize the Tax Benefits of Puerto Rico

Note that my articles on Act 20 and 22 are focused on US citizens moving their businesses to Puerto Rico. We can also combine Act 20, 22, and the E-2 treaty investor visa to get you residency in the US without the tax bill.

I hope you have found this article on US E-2 Treaty Investor Visa Tax Strategy helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for more information. I will be happy to assist you to build a business in the US or Puerto Rico and qualify for residency.

IRS Can Revoke Passport

Warning: The IRS Can Now Revoke Your Passport

This is an urgent warning for Americans living, working, investing, or doing business abroad. The IRS now has the authority to revoke your passport. If you have unfiled tax returns or you owe more than $50,000, the government can take away your US passport. Also, the Service can now refuse to issue a passport to anyone owing more than $50,000.

On December 4, 2015, President Obama signed into law H.R. 22, a 5-year, $305 billion infrastructure spending bill to address the nation’s aging and congested transportation systems. Buried on page 1,113 of this massive bill was a chapter titled Revocation or Denial of Passport in Case of Certain Tax Delinquencies. This section gives the IRS control over your person and your right to travel, live, work, bank, invest, protect your assets, and conduct business outside of the land of the free.

The government tried this same back in 2012, but it was met with resistance from all sides. In fact, the suggestion never made it out of committee. This time around, things were different. The change to our tax code was tagged onto a bill that either no one read or no one had the guts to stand up to. Apparently the need for infrastructure improvement and the amount of pork it would bring to so many States, not to mention the need to increase revenues from the producers, trumped your right to travel, self determination, and to international commerce.

H.R. 22 adds section 7345 to the Internal Revenue Code. The law says the State Department can revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt in excess of $50,000.

  • I read this to mean that the IRS can revoke your passport if you owe back taxes or have unfiled returns. This is because failure to file typically results in returns being prepared by the IRS computers on your behalf, no human intervention or review required.  These computer generated return create a balance due and then a tax debt. See SFRs below for more information.

The amount of $50,000 includes interest and penalties, so it’s a very low threshold. If your tax debt has been around for a few years, it’s common for 50% to 75% of the amount owed to be from interest and penalties.

The standard FBAR penalty starts $10,000 per year and can reach as high as $100,000. The same goes for Foreign Corporate returns. Specifically, IRC Section 6038(b)(1) provides for a penalty of $10,000 for each Form 5471 that is filed after the due date.

This is all to say, $50,000 is pocket change when it comes to a tax dispute involving an offshore company or business.

Here’s how a tax debt gets “certified” without you ever being notified.

Let’s consider the word “certify” for a minute. As I said above, anyone the IRS certifies as having a seriously delinquent tax debt in excess of $50,000 is at risk.  The IRS can “certify” a debt by simply printing out a report showing their internal processes were followed and that the computer says you owe money. No need to prove their case in court, get a judgment or collection order from a judge as is required in all other civil cases, audit the file, or even telephone the taxpayer and ask for an explanation. If the computer says you owe money, your passport can be revoked or refused.

Let’s say you’re living abroad and haven’t filed your tax returns for a year or two. The IRS computers get a report of your offshore accounts under FATCA and generate what are called Substitutes for Returns (SFRs). SFRs are prepared on your behalf using whatever data the computers has with zero deductions, exemptions, or expenses. The balance due from an SFR is always much higher than had you prepared a proper return.

Once the SFRs are entered into the system, a notice is mailed to your last known address informing you of the amount due. After a few notice, a final letter called a CP-504 is sent certified mail. If you don’t contest this bill in tax court within 30 days, the amount becomes final and payable.

The IRS can now “certify” the debt, file a tax lien, and revoke your passport. It matters not that you never received any of the letters. Their only obligation is to mail notices to your last known address using traditional US mail. If you’ve moved, or letters never reach you because you are abroad, that’s your problem. No one will search for you or call you at this stage of the process.

A warning for Expats:

I get calls all the time from people who assume they don’t need to file returns if their income is under the Foreign Earned Income Exclusion amount. They are living abroad, never set foot in the US, and make under $100,000. Americans abroad all to often think they aren’t required to file. They feel no sense of urgency because, once the forms are in, no taxes will be due. Why spend money on tax preparation?

Here’s the problem with that plan: As of January 1, 2015, your foreign bank account and income has been reported to the IRS under FATCA. This data can be used to prepare SFRs, create a debt, and then the IRS has you. The IRS will not give you credit for the FEIE when they prepare an SFR.

Here are other examples of erroneous tax debts that are frequently certified by the IRS.

Let’s say you are living in the United States and recently moved. You forgot to inform the Service of the move. Someone files a report of income (Form 1099, W-2 or K-1) in error.

If you have already filed your returns, the IRS will send you a Notice of Proposed Changes. If you fail to respond to this letter, the change will be made and a tax debt created. Again, it doesn’t matter if you participated in the process or had knowledge of what was going on.  

This will also apply to someone whose identity is stolen. I can’t tell you how many cases I’ve had over the years where someone’s Social Security number was used by an illegal alien to get a job. The worker gets paid under your Social with zero withholding, a W-2 was issued tied to your account and the IRS comes after you for the taxes owed.

Because the alien claimed 20 dependents, there was no withholding… no money paid to the IRS for taxes due against the wages earned. Add to this the fact that it takes several years for the IRS to come after you, and that interest and penalties are added to the balance, and you will see that $50,000 is a very low threshold.

  • There were almost 2 million suspected tax identity theft incidents in 2013, the most recent data available. This compares to about 440,000 in 2010 according to the Treasury Inspector General for Tax Administration. Cases of tax identity theft are on the rise in 2014 and 2015. Click here for a list of IRS prosecutions for identity theft in 2015.

Just like in the examples above, a tax debt that involves identity theft is created and certified without the taxpayer having any idea what’s happening. This situation takes months of hard work to unwind… work that can only begin after the you find out there’s a problem. It’s now possible that the first you hear about the debt is when you are being forcibly returned to the US, your passport shredded, and your reputation destroyed.

Here’s what happens when the IRS revokes your passport:

If your passport is revoked, and you don’t have a second passport in hand, you will be prevented from traveling outside of the United States. If you’re abroad when the hammer comes down, you will be forced to return to US.

In addition to the travel issues, it will be impossible to open bank or brokerage accounts abroad, create asset protection structures, operate a business, or invest outside of the land of the free without a passport.

It matters not to Uncle Sam that forcing you to return to the US without notice will cause you significant financial harm. There is no process for an appeal… you are simply put on the first plan to the US and told to go deal with the IRS. The only good news is that the flight home is free. The bad news is that you don’t get to chose your travel date or the US city in which you are deposited (usually a major hub).

  • You’d better hope to God your credit cards are working or you’ll be sleeping on the street in Miami or Houston until someone sends you money.

If you don’t have a second passport, there is no right to an appeal, to speak with an attorney, plead your case to a judge in your country, nor any way to stop the airport from sending you back to face the Service. Without valid travel document you are in legal limbo and have no recourse or rights.

You see, the IRS will revoke your passport while you are in transit. They know when you are flying from one country to another and will revoke your passport while you are in the air with a few keystrokes.

When you land and attempt to enter your destination country, you find your passport’s invalid. The airline is now required to return you to the country that issued your passport. You have no right to an attorney, no right to enter the country to fight the claim of a certified debt, and no right to an appeal.

You will be held in the transit area under guard until being put on the next flight. Think of Tom Hanks in The Terminal (2004) and Edward Snowden. Unless Mr. Putin comes to your rescue, you are headed back to the States.

Being denied admission to a country is not the same as being extradited. Once you are in a country, you have all the rights conveyed by their legal system and courts.  When you’re in transit, you have no rights… you are at the mercy of the country whose passport you hold. If you don’t have a valid travel document, your only choice is to return to your home country.

Here’s what you can do to protect your freedom:

Your best defense against H.R. 22 is a Second Passport. With a second passport in hand, you are in control. You can leave the US, do business abroad, access your foreign assets, open bank accounts, and generally live your life where you wish.

If you are caught at an airport, and you have a second passport, you can’t be forcibly removed to the US. You do have a valid travel document and must be allowed to continue on your way.  

Even if the country you were attempting to enter sides with the US and denies you entry, you can pick any departing flight to a country that allows visa free travel on your second passport. For this reason, we value second passports based on the number of visa free countries they offer.

You can only be forced to return to the US if you don’t have a valid travel document / second passport in hand. For this reason, it is the first, best, and possibly the only defense against the Internal Revenue Service.

There are four ways to get a second passport:

  1. By heritage. If your parents or grandparents were born outside of the United States, you may be eligible for citizenship from their original country.  If you would like us to review your heritage options, please send an email to info@premieroffshore.com.
  2. By marriage. Most countries grant residency and then citizenship to the spouse of a citizen.
  3. By investment or cash payment. You can make an investment and/or pay cash to get a second passport immediately. If you don’t qualify for a second passport by family lineage, and have the money to spend or invest, we can help.  
  4. Earn citizenship through residency. In some countries, you can become a resident, contribute to their economy and culture, and earn the right to apply for citizenship after a few years.

Several quality countries will sell you a second passport for the right price. Cash offers start at about $300,000 all-in and will exceed $1 million for a top tier EU passport (Malta and Austria). For a list of countries and programs, see: 10 Best Second Passports.

As you can see, second passports are expensive and not for everyone. The next best thing is to residency with a path to citizenship. For example, if you qualify, you can become a resident of Panama for about $8.600. Once you have residency, you can enter Panama using your visa and identification card.

Also, as a resident you have more rights to contest an attack by the IRS. A tourist has little or no standing, but a resident has been given status by the fact that he or she is a lawful member of the community.

Finally, a resident may stay in a country as long as they wish. A tourist must usually travel outside the country every four or six months, putting them at risk each and every trip. Also, if you’re caught overstaying your tourist visa, you can be removed from the country… something that is common in Latin America.  

Most importantly, some forms of residency lead to citizenship after a few years. For example, if you’re a resident of Panama for four years, you can apply for citizenship. With citizenship comes a second passport.

Just about every country has a residency program but few lead to citizenship. The lowest cost residency options are Panama and Belize. Belize does not have a path to citizenship. A passport from Panama is an excellent travel document, so I recommend that program for anyone that wants to “earn” citizenship over a number of years rather than purchase it.  For more information, please checkout our post on The Panama Friendly Nations Visa.

I hope this article has been helpful. For more information on second passports and residency programs, or to see if you qualify for citizenship through family heritage, please send an email to info@premieroffshore.com or give me a call at (619) 483-1708. 

IRS Data Collection

The IRS Data Collection Machine

Much like the NSA, the IRS data collection machine is building a file on all Americans. It’s online now and will be ready to use in all audits within one year.

The IRS collects more useful data on you than does the NSA and will begin making it available to auditors shortly. Some IRS data collection methods, such as grabbing Facebook posts and bank records before beginning an audit are already common practice.

Historically, the IRS relied on Americans to self report, and matched those tax returns to forms from U.S. employers, mortgage companies, and banks. If your 1040 tax return didn’t match your W-2 wage statement, or 1099a (stock trades and independent contractors), bank interest income, property tax and mortgage interest reports, sale of real estate, K-1s from partnerships, etc., then you would receive a letter from the IRS. You would either be told to send in more money because your tax return didn’t match what the IRS computers say you owe (called a change report), or you would be audited.

Beginning in 2014, the IRS will get much of this same information from foreign banks and brokerages. If you have a bank account or investments offshore, expect that your institution will be reporting to the IRS. (Search FATCA for more information).

In addition, the IRS has been building backdoors in to most email systems and social media companies. The great collector is amassing enormous amounts of data on you, your friends, your income and assets, and your travel. You can be certain that these IRS data collection tools will be used against you in future audits.

I also believe this IRS data collection system will be used to target individuals and companies. Maybe groups will be selected for audit because their online activities show they are likely to have unreported income, or maybe individuals and charities will be selected based on political affiliation. No matter how it’s used, these new IRS data collection tools put you at a significant disadvantage.

Of course, the IRS says they don’t use “big data” to target or select individuals for audit. They claim it’s used in micro analysis only. IRS data collection is used to “estimate the U.S. tax gap, predict identity theft, and find refund fraud” (according to the IRS data collection office).

* The tax gap is the difference between how much is owed and how much is collected by the IRS.

Whether or not you believe the IRS, they are hoovering up data on Americans like the NSA. Though, the IRS is going after more actionable data. Information that can be used against individuals in an audit. So far, it has been shown that the IRS is collecting the following:

  • Phone bills,
  • Credit card statements,
  • Bank statements (not just interest income or 1099s, but complete copies of your bank statements),
  • Hotel, air and other travel information,
  • Copies of contracts,
  • Facebook, Twitter, eBay, Google, and all social media accounts,
  • Skype history, including chat and location data, and
  • All email systems including Google.

No matter what you may hear in the press, the IRS often comes armed with one or more of these items in large audits. I have personally been involved in cases where travel records, bank statements, Facebook and Skype activity, and email hacking have been used by the IRS against the taxpayer.

One tip you might find helpful for email: Google and others backup messages for about 9 months after you delete them. If you use a U.S. email service, deleting messages right before the hammer comes down is not helpful.

As for Skype, it’s often used to track your phone calls and chats. I have also see it used to track you. When you login, Skype keeps a record of your IP address. With this, the IRS knows where you are in the world. For example, I have seen Skype records used to prove someone was in Panama.

This is all to say that the IRS is currently collecting massive amounts of data on U.S. persons and putting it to use far more effectively than the NSA. Expect IRS data collection to be used to find targets and during the audit process. If you are currently being audited, assume the IRS has access to all of your emails and social media accounts.

Have you been making calls to offshore banks? Then you might become a target. Have you traveled to St. Kitts and Nevis recently? What about Hong Kong? Your travel logs may soon be compared to your U.S. tax return and your FBAR. If you’ve been to Hong Kong on business, but never disclosed any assets, banks, or income from there, you may be a prime audit candidate.

I believe these IRS data collection tools are an egregious breach of our personal privacy. A government agency is collecting data to be used in civil or criminal cases without court oversight or a warrant. Add to this the fact that the IRS has been hacked on multiple occasions and frequently shares its data with 3rd party contractors and collection agencies, and you see the risk of identity theft or harassment.

And these IRS data collection systems are unnecessary. 98% of the revenues collected by the IRS come in from voluntary filings. Does plugging a 2% gap warrant such draconian measures?

Panama Tax

Panama Tax Review

If you’re an American living, working, or investing in Panama, the Panama tax system is your friend. The Panama tax code may allow you to live tax free in Panama and, possibly, in the United States. This Panama Tax Review will explain how to reduce your worldwide tax bill.

Before getting in to specifics, it’s important to note that Panama, like all civilized nations (not the U.S.), taxes you on your local income. Only America taxes its citizens on their worldwide income.

So, if you move to Panama and open a restaurant, you pay income tax on your profits. You will also be subject to payroll and social security taxes. This is the same result you get in the United States.

However, if you move to Panama, and structure your business properly, you won’t pay Panama tax on foreign incomes. If your business is selling a product to clients in the United States, all income earned in Panama is foreign source (from the U.S.) and not taxable in Panama. If you are selling to individuals in Panama and the United States, only those sales to Panamanians are taxable.

This is the opposite result you get with a U.S.-based business. When you operate from America, and sell to people outside of the country, 100% of the income earned by your company is taxable here. Even if you move abroad Uncle wants his cut. Though, this article will help you minimize that tax bill.

This article is focused on the Panama tax rules for those living, working, or investing in Panama. If you retire to Panama, but don’t buy real estate there, then you should have no Panama tax issues.

Introduction to Panama Tax

Panama taxes its citizens and residents on income earned within its borders. You, the American citizen, become a Panama tax resident if you live in Panama for more than 183 days within a calendar year. If you don’t operate a business in Panama, or purchase real estate there, it’s unlikely their tax laws will affect you.

Panama has no wealth, inheritance or gift taxes. Therefore, it’s an excellent jurisdiction in which to form an international trust (called a Panama Foundation, but it functions under U.S. laws as a foreign or grantor trust). Such a structure will allow you to protect your savings and minimize U.S. estate taxes by facilitating transfers to heirs and moving assets out of your taxable U.S. estate.

Also, interest from bank accounts, Certification of Deposits, and most forms of investments are tax free. If you buy and then sell stock on the Panama exchange, no tax will be charged. No tax is due when you sell stock on a foreign exchange either, but the point here is that buying and selling stock within Panama, even on their exchange, does not bring you in to their tax system.

At this point, you might be wondering how Panama earns money. Well, residents pay tax on local income, corporations pay tax on gains derived from business transactions within Panama, and just about everything sold in Panama is subject to a 7% Value Added Tax (VAT). And, of course, they make buckets of money from the Panama Canal.

Taxation of Real Estate Transactions in Panama

Real estate transactions within Panama are taxed as capital gains. There is only one rate for such gains, 10%. No differentiation is made between long term and short term capital gains.

This Panama tax rate of 10% on the net profit from the sale is the general rule for real estate. You can also elect a 3% rate on the gross sale price. Here’s how it works.

Just like in the United States, you pay capital gains in Panama on net profit earned when you sell real estate. If you buy a condo for $250,000, put $25,000 of improvements in to it, and sell it for $300,000, your gain is $25,000 and your tax due is about $2,500 … simple enough.

* You will also pay a 2% transfer tax at the time of sale. This is based on the sale price or the assessed value, whichever is higher. Your transfer tax is increased by 5% for each full calendar year you hold the property.

The government ensures compliance with its tax laws by requiring the buyer to withhold 3% of the purchase price and pay that over to the tax authorities. You, the seller, file a return to claim a refund the next year. In the example above, the buyer would withhold 3% of $300,000, or $4,000, and you will file a refund for $9,000 – $2,500 = $6,600.

If this 3% on the gross sale price is lower than the 10% capital gains tax on the net profit, you may elect to not file a return. You have the choice of paying the 3% or 10% rate on the sale of real estate.

So, in the example above, if you bought the property many years ago for $20,000, didn’t make any improvements, and sold it for $300, 00, you would choose to pay the 3% tax of $9,000. The 10% tax on the net gain would result in a bill of $28,000.

VAT in Real Estate: I will conclude this section on Panama tax by noting that VAT applies to short term rental income. If you rent out your condo for a term of six months or less, you will pay 7% VAT, VAT doesn’t apply to rental contracts longer than six months.

Personal Income Tax in Panama

If you operate a business in Panama, work for a local company, have employees in the country, or draw a salary, you need to understand their personal income tax rules.

Panama’s tax code is much more efficient than that of the United States. They have only three tax brackets:

  • If you earn $0 to $11,000, you pay zero tax.
  • If you earn $11,000 to $50,000, you pay 15% on the amount owner $11,000 (that is to say, the first $11,000 is tax free).
  • If you earn over $50,000, you pay $5,850 on the first $50,000 plus 25% on the amount over $50,000. So, your Panama tax rate on a salary of $150,000 would be $5,850 + $25,000 = $30,850 less any deductions.

Each person is allowed a standard deduction of $800. Other allowed reductions include mortgage interest, charitable and political contributions, and unreimbursed medical expenses.

You’re not required to file a return if your only income is from salary (you have no capital gains, etc.) and you don’t wish to take any deductions other than the standard at $800. In that case, the employer withholds the required amount from each paycheck and no return need be filed.

If you wish to file a personal income tax return in Panama, it is due March 15. You may request an extension until May 15.

Employment Taxes in Panama

If you have employees in Panama, be ready to pay significant employment taxes. Social Security and employment taxes are a primary revenue sources for Panama and a reason they are willing to offer corporate tax deals … to increase employment and employment taxes.

* Employment taxes in Panama are about 30% higher than United States. However, the cost of labor is less than 25% of major cities in America, so the employment tax expense is relatively minimal.

As the employer, you pay employment tax of 12% on wages. Also, you must withhold 9% from the employee. Therefore, total employment tax in Panama is 21%. This compares to 15% (self-employed) to 17% (with Obamacare) in the United States.

Also, you are obligated to pay a one month bonus to each employee each year. So, when you calculate costs per employee, you will take the base salary times 13 (not 12 months) and add 21% for employment taxes.

For example, if your employee earns $1,200 per month, they’ll cost you $1,200 x 13 months = $15,600 in salary and $1,872 in employment taxes.

Corporate Tax in Panama

The Panama tax rate on corporations is 25% compared to 35% in the United States. Panama taxes only local source income. There is no Panama tax on income from outside the territory, even if that money is deposited in to a Panama corporation and account.

Most of my readers will avoid corporate tax in Panama all together. It should only apply if you are selling goods or services to Panamanians. If all of your sales are done through the internet to persons in the U.S. and Europe, you may have no Panama source income.

Also like the United States, corporate income tax usually applies to money you leave in the company … retained earnings held by the Panama Corporation. If you do have Panama source income, you may be able to eliminate corporate level tax by withdrawing your net profits as salary. You will pay personal income taxes but avoid double taxation.

However, if you operate a “large” business within Panama, and your Panama source gross income is $1.5 million or more, you may be subject to alternate minimum corporate tax.

First, I note that corporations are taxed on their net business income. You may deduct salaries, as well as all “ordinary and necessary” business expenses … just as you do in the United States.

However, if you gross more than $1.5 million in Panama source sales, you will be required to pay minimum corporate income tax of 4.5% on those gross sales.

* Another way to express Alt Min tax in Panama is that your large business pays tax on local sales minus 95.5%. If your local sales are less than $1.5 million, you are exempt from Alt Min tax in Panama.

Let’s say your Panama Corporation earns $2 million in local income. It’s your first or second year of operation and your deductible expenses are more than $2 million … so you have a tax loss for the year. Panama Alt Min tax comes in and requires you to pay 4.5% on $2 million, or about $90,000 in corporate taxes.

That means you’ll pay at least 4.5% on local sales in a large business. If 25% on net profits results in more tax being due than 4.5% on gross sales, then you pay Panama tax at the 25% rate.

In order to deter untaxed transfers between Panama corporations and any other tax shenanigans to minimize tax on local source income, Panama taxes/dividends, loans and advances. A 10% withholding tax applies to dividends between corporations on income derived from local sources. Also, a 10% tax is levied on loans or advances to corporate shareholders. If these transfers are done in a structure involving bearer shares, a 20% withholding tax (rather than 10%) applies.

If you can prove that the income being transferred is foreign source (earned in transactions outside of Panama), these taxes do not apply. In that case, there is no withholding on dividends, loans or advances.

* These corporate tax laws apply to companies operating within Panama City. Special rules apply to businesses within the Colon Free Zone, City of Knowledge, Panama Pacifico (my favorite tax free region), or any of the other free zones within the country.

* Special rates may apply to corporations with local gross sales of less than $200,000. These “small” businesses pay a lower blended personal/corporate rate.

Taxation of Americans in Panama

There is no Panama tax on bank interest, CDs, U.S. retirement distributions, or income derived from sources outside of Panama. Therefore, most of you won’t be subject to Panama tax unless you invest in local real estate.

Unfortunately, Uncle Sam wants his cut no matter where you live and/or invest. Though, you do have tools at your disposal to reduce your U.S. tax bill.

First, you can make investments in Panama through your U.S. retirement account. By forming an offshore IRA LLC, you can defer U.S. tax in a traditional IRA or eliminate it all together in a ROTH IRA.

Next, if you live in Panama, and will qualify for the Foreign Earned Income Exclusion (FEIE), you can draw a salary from your active business of about $100,000 per year ($200,000 husband and wife), retain the balance in your Panama Corporation, and pay no U.S. tax. You will find a number of articles here on the FEIE and operating through an offshore corporation to reduce or eliminate U.S. tax.

If you are living in Panama, you might bill your customers through an offshore company formed in another jurisdiction. When your sales are to persons in America and you are living in Panama, bill through a corporation in Belize. Then, draw a salary of up to the FEIE from that Belize Corporation to eliminate Panama employment taxes.

* This only works for you, the U.S. person living in Panama. Don’t try it with Panamanians or you might find yourself in trouble with the local authorities.

I hope you’ve found this Panama Tax Review helpful. If you have any questions, or would like assistance moving you or your business to Panama, please give us a call or send me an email to info@premieroffshore.com.

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 info@premieroffshore.com.  All consultations are confidential.  We have helped many clients navigate the two previous IRS Offshore Voluntary Disclosure Initiatives and we can get you through this one with the best result possible based on your particular situation.

IRS Fees

IRS to Target Offshore Bank Accounts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cheap offshore Company

A Cheap Offshore Company Cost Me $100K

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Offshore IRS Audit

Will the IRS Audit Me for Going Offshore?

For those of you living and working abroad, or investing outside of the United States, the fact that you file one or more of the offshore company forms and report a foreign bank account on the FBAR will have little to no effect on your chances of an audit. The IRS is focused like a laser on those who fail to report their offshore transactions. So, if you are in compliance, you have little to fear.

To put it another way, individuals who file an offshore return are not currently a target for the IRS. They have amassed their forces to go after the banks and non-compliant individuals because that’s what makes headlines…that’s what brings in the cash.

How much are we talking about you ask? The IRS has brought in about $4 billion through the Voluntary Disclosure Program and another few billion in fines and penalties against Swiss and other banks who helped Americans avoid taxes. These are the kind of numbers the government is going for…they are not concerned with the average person’s compliant offshore dealings.

This is all to say that the IRS is not so concerned with those in compliance. If you have been filing your forms and paying along, you are no more likely to be audited that the average person. If you get in to compliance voluntarily, then you take the target off of your back.

It is also important to realize that the IRS audits less than 1% of taxpayers each year…and their budget for 2014 and 2015 has been cut by Republicans angry about the way their fund raising groups were treated in the last election cycle. Based on the following factors, I believe that most of my clients have a 3% to 5% chance of facing the tax man…not because of international structures, but because of their higher levels of income.

My point here is not that you will never be audited. It is simply that going offshore does not significantly increase your probability of facing down the IRS. For more on this topic, please take a look at my article How to Avoid an IRA Audit – Expat Edition.

If you are behind in your U.S. tax filings, I suggest you take a look at my article on the IRS Voluntary Disclosure program. If you qualify as an Expat, this might be a cost effective avenue for you to get right with the Service.

Give Up US Citizenship

Americans Give Up US Citizenship in Record Numbers

Record numbers of Americans gave up US citizenship in 2013. As the IRS mafia becomes ever more hostile to its citizenry, Americans give up US citizenship in record numbers. In 2013, 3,000 Americans lined up at embassies around the world to renounce their citizenship and get Uncle Sam out of their pockets for good. This is an increase of well over 200% in the last year, up from 933 renunciations in 2012, 1,780 in 2011 and 235 in 2008.

Why did so many Americans give up US citizenship? The three most common reasons given were 1) the IRS, 2) the IRS, and 3) the IRS.

Let’s take a step back: America is about the only country in the world that taxes its citizens on their worldwide income, regardless of where they live. So long as you hold a U.S. passport, the IRS wants its cut. And the IRS has become very hostile in attacking American’s abroad and those offshore accounts, putting a number of them in prison over the last few years. Of course, these attacks are limited to average people and not big corporations, who have record amounts of cash offshore.

This attitude has resulted in some very unreasonable tax assessments. For example, I have met many people who have never set foot in the U.S., but whose parents wanted them to have a U.S. passport at birth, who have been caught in the IRS mill. Once in the government’s sites, they were forced to pay enormous fines and penalties, in addition to the tax due. Adding insult to injury, some of these people had their bank accounts seized and real estate sold at auction to pay in to the Obamanation.

Then there are the laws targeting offshore banks. If you are a U.S. citizen, you are not wanted at most financial intuitions. Of those banks that will do business with you, most will hit you with extra fees, such as $500 to open the account and a $300 per year special assessment to cover compliance costs.

Finally, there is the invasion of privacy. As an American, you have zero right to privacy in your financial dealings. In fact, nearly all offshore banks will report your transactions to the IRS.

  • If an offshore bank fails to report your transactions, they are on the hook for major fines or being locked out of the banking system all together. Considering this risk, and the high cost of compliance, it’s no wonder that Americans are persona non grata.


If you are thinking of giving up your US citizenship, there are several hoops you must jump through. First, you don’t just show up at the embassy, burn your passport, give the ambassador the finger, and go along your way. You must complete a complex process and receive a renunciation letter before you are free. This might include an audit of your last 3 to 5 years of tax returns and an in-depth review of your finances to ensure you are paid-up.

  • Before you open a new account as a free man or woman, the bank will want proof that you have renounced your U.S. citizenship. Even if you have a second passport, you must prove that you gave up your US citizenship. Therefore, getting this renunciation letter from the consulate is of the utmost importance. It also ensures the IRS will not come after you years later looking for more cash.

Second, you might need to pay an exit tax. If your worldwide assets exceed $2 million, or your average tax bill over the past five years has been more than $151,000, a tax may be due on unrealized capital gains.

Basically, you will be required to file a final U.S. return as if you have sold all of your assets for fair market value and you will be taxed on that gain the year you give up US citizenship. Calculating this cost to escape is simple for those who hold major stocks. If your assets include private investments, real estate that has not easily appraised, or you have other issues in determining fair market value, you could be in for a battle with the IRS.

Third, you must have a second passport in hand before you give up your US citizenship.  If you give up your US passport and don’t have another ready and waiting, you will be a person without a country and it will become impossible to travel or immigrate.

If you don’t already have a second passport, there are three ways to get one.

By nationality or family history: If your parents or grandparents were born outside of the U.S., you might be able to get naturalized in their home country. For more information on this option, I suggest you read up at Live and Invest Overseas.

Earn your second passport through residency: If you move to a country like Ireland, Panama, Chile, New Zealand, or Singapore, you should be able to gain citizenship within 3 to 9 years (assuming the rules don’t change while you are waiting).

Of the residency programs that I have investigated, I believe the best is the favored nation’s residency permit linked to a teak investment in Panama. This requires a minimal investment of $15,000 and allows you to gain residency immediately. Citizenship should be processed in 4 to 5 years. For more information on this program, please contact me at info@premieroffshore.com.

Pay for it: You can purchase citizenship and a second passport from St. Kitts and Nevis, Dominica, and a few other nations. Most of the available programs require you to have no criminal history and cost anywhere from $165,000 to $300,000, depending on family size and other factors.

For a detailed description of the available economic citizenship programs, please see my Second Passports page. You will find the requirements and costs for Dominica and St. Kitts on this page. If you have issues in your past and need a more lenient jurisdiction, please contact me for a consultation.

I hope this information has been helpful. As the IRS becomes ever more hostile to its populace, I believe we Americans will have fewer and fewer escape and banking options. I also predict it will become very challenging to move assets out of the United States. If you would like to know more about how to give up US citizenship, please contact me at info@premieroffshore.com for a confidential consultation.

U.S. Source Income

Tax Season’s Best Questions

We get a lot of good questions from Expats around the globe during the April 15 and October 15 tax seasons. Here are a few from this go-round.

Moving to a High Tax Country

Q: “I’ve just moved to Australia in the last year.  I currently have very little assets in the US and am working for An Australia company building a saving account in Australia. I am planning on purchasing a home and or investment property in the next 12 months with the intention of having around 5 properties in a few years.  I’m trying to plan in advance to avoid long term capital gains and use smart tax strategies.  I am planning on buying in Australia and own no property in the US.  Will the US tax my income and capital gains?  If you have any suggestions on resources to utilize I’d be very appreciative.”

A: Unfortunately for you, US tax will not be an issue. This is because your tax rate in Australia is certain to be higher than it would be in the US. For example, your personal tax rate in Australia will start at 19%, and max out at 45% on income over $180,000. Your rate in the US on income over $180,000 should be 28% to 39.6%.

Making things worse, Australia does not have a capital gains rate…capital gains are taxed the same as your ordinary income. Therefore, long term gains in Australia might be taxed at 45% compared to 20% in the US.

When you move out of the US to a country with a higher tax rate, you should not expect to pay any tax to the US. You must still file your US tax returns each year, but the Foreign Tax Credit should eliminate any US tax on your Australian income.

The Cost of Compliance

Q:  “Thanks for the wonderful newsletter. I hope I get this email to you. I believe that someone from US would have a very hard time when opening up an IBC as it gets really expensive to file IBC paperwork with the CPAs. If also exiting the US with expatriation, it would cause problems with expatriation taxes. My CPA keeps on telling me that it would require $4,000-$5,000 dollars just to file all the forms needed. I was shocked at the costs…I am confused since they both told me there are a lot of people selling these offshore vehicles which can get me in a lot of requirements and problems. This is the same answer that I got from various tax attorneys in USA.”

A: I agree completely that there are a lot of promoters out there selling IBCs that can get Americans in to trouble. One of the quickest paths to disaster for an American is using an incorporator that does not provide US compliance. For more on this topic, checkout my article on offshore asset protection scams.

To avoid these issues, you should use a US tax expert to form your offshore structure. Companies such as mine will ensure you are in US tax compliance from day one.

Regarding the costs of compliance, offshore corporations and IBCs file Form 5471, which is a US corporate tax return designed to report ownership, control, and income from these types of structures. This return will require a profit and loss statement and balance sheet, but should be no more complex or costly than a typical US corporate return, Form 1120.

If someone is operating a large business with employees offshore, is retaining earnings offshore, or has a number of partners in the business, Form 5471 can become expensive…just as a complex Form 1120 can become costly.

If you are using an IBC for basic asset protection, filing your US return should not be a major expense. We typically charge $850 for Form 5471. If you are being quoted $3,000 to $4,000, you are either working with a major firm such Delloitte, or your CPA simply doesn’t want to handle the returns and is quoting a ridiculous rate to prevent you from setting up a structure.

State Tax Issues for Expats

Q: “I have heard that some people move to Texas or Florida before going offshore. Can you tell me why? When I moved from California to Panama, and become a resident of Panama, I had no problems.”

A: Right, if both H and W move out of California and become tax residents of a foreign country, then their State issues are eliminated. However, moving to Florida or Texas before going offshore reduces the risk of being audited on this issue by California.

First, I note that California doesn’t have a FEIE. So, if you move out of CA for two years and intend to return, 100% of your income earned abroad is taxable in California. You might avoid Federal income tax with the FEIE, but not CA income tax.

Second, for those using the 330 day test, State tax can be a real problem. This is especially true of they keep their old home and other ties to the State.

For example, I have had the case where Husband works offshore and qualifies for the FEIE using the 330 day test (military contractor) and the case where he lives offshore and qualifies under the residency test. Their wives lived in CA with the kids.

For the contractor, CA has no FEIE and thus 100% of his income is taxable in CA. You see this a lot with military contractors and oil field guys in hostile countries…obviously, H is not a resident of Iraq and intends to return to wife and kids when his contract is up.

For the person using the residency test, CA says half of H’s income is attributable to W because CA is a community property State. Therefore, 50% of H’s income is taxable in CA.

A more common example for non-contractors might be H and W have a small business netting $100,000 in Panama. H qualifies for the FEIE using the 330 day test, but W does not. She wants to spend more time visiting the kids / grandkids, while H is just done with the US.

They put all of their income under H and pay no Federal tax using his FEIE.

Then, CA comes along and says W is really a resident of CA, 50% of H’s income is attributable to W, and 50% of the income is taxable in CA.

One reason W might be a resident of CA is that she did not break off sufficient ties to the State and she intends to return there someday.

Do you disagree with CA’s determination? Legal fees will be at least $10,000.

Offshore Contractors and the FEIE

Q: “Christian, I am writing for my son who is in Afghanistan.  He works as a contractor there but need to find a tax person who understands the 35 days in country rule.  I’m sure you do but don’t know militarily if that is different.  Would like your recommendation if possible.”

A: Yes, I am familiar with this FEIE and have had many contractor clients…maybe around 100 over the years. Here are the rules for contractors abroad:

First, a contractor is someone paid by a US or foreign corporation and not directly by the US government.

Second, a contractor may take the FEIE (military personnel do not qualify). Contractors must use the 330 day test and not the residency test. Here is a detailed article on the 330 day test.

The reason he must take utilize the 330 day test is that a contractor is not a tax resident of Afghanistan because he does not intend to make that his home. His intention is to return to the US after his contract is up. So, he must use the 330 day test and not the residency test, and may spend no more than 35 days in the US.

This means that he should spend most of his vacation days somewhere other than America. Remember, he is not required to be in Afghanistan to qualify…he need only be outside of the US. So, if a contractor is on a 2 months on 1 month off rotation, he should vacation in Latin America or the Caribbean.

It is important to note that, if a contractor misses the FEIE even by one day, then he loses the FEIE completely and all of his income is taxable.

Third, if a contractor is paid by a US corporation, then he must receive a W-2 with Social Security and Medicare deducted. If paid by an offshore corporation, then the contractor is not liable for these taxes.

Fourth, there is a special component of the Foreign Housing Exclusion for contractors in war zones. In most cases, he (the temporary worker) may only deduct the cost of maintaining one home abroad. If your employer provides housing, that is his tax home.

However, if he maintains a second, separate household outside the United States for his spouse or dependents because living conditions near his primary home are dangerous, unhealthful, or otherwise adverse, he can exclude / deduct this second home using the Foreign Housing Exclusion.

In other words, if he is in a war zone, he may exclude the value of two homes outside of the US…one for himself and one for his family. If he is not in a war zone, he may only exclude his primary offshore home.

Adverse living conditions include:

  • A state of warfare or civil insurrection in the general area of your tax home, and
  • Conditions under which it is not feasible to provide family housing (for example, if you must live on a construction site or drilling rig)

Moving a Business Abroad

Q: Christian, I have moved to Costa Rica and just love it here. I have a business and a corporation in Florida and need some tax advice. Can you help?

Q: You indicate you are operating a business through an FL company while living offshore. This will certainly increase the amount of tax you pay to the United States.

If you will qualify for the FEIE, then you should add an offshore corporation to your structure. The offshore company will bill the US company and you will draw your salary from the offshore company. This will eliminate self-employment and all other related taxes…reducing your US taxes by at least 15%.

Such a company should be in a country other than where you are resident, and one that will not tax your income. Therefore, I recommend Belize. I also note it must be an IBC and not an LLC.

Retire Overseas Tax Free

How to Avoid Filing Offshore Tax Returns – IRS Form 5471 & FBAR

Any offshore business owned and operated by a US citizen must file IRS Form 5471, an FBAR, and disclose all of its dealings to the US government. Here, you will learn how to legally reduce or eliminate these filing and disclosure obligations.

Most importantly, you must file US Treasury Form TD F 90.22.1 (generally referred to as the FBAR) if you have more than $10,000 in an offshore bank account or accounts, IRS Form 5471 if you operate your business through an offshore corporation, and IRS Form 926 if you transfer money or assets to an offshore corporation.

If you are a US citizen and the sole owner of the business with no non-US partners, then you are stuck filing these forms in their entirety. Basically, you must handle accounting and reporting of your offshore business just as you would if your business was in the United States.

As such, the IRS has the right to audit your offshore business and refuse to allow deductions for any expense you are unable to justify under the US tax code. It does not matter what the accounting and tax practices of your country of operation are…US citizens must report and pay tax in the US based on US tax an accounting standards.

If you do have partners who are neither US citizens nor US residents, then you have some planning options. First, if you have complete trust in your partner, then he or she can be the sole signer on the bank account, which means you are not required to file the FBAR.

The same is true of IRS Form 5471, the offshore corporation return. If the business is owned solely by a non-US person, and you are an employee, then the entity has no US reporting requirements.

It is important to note that I am talking about true ownership, not just some nominee director put in place to skirt the rules. This will not work and can land you in hot water with the Feds. The FBAR must be filed by anyone who has signatory rights or control over an offshore account and IRS Form 5471 must be filed by anyone with significant ownership, control, or voting rights in an offshore company.

With that said, unless your non-US partner is your spouse, it is probably impractical to give up complete control of a business just too avoid dealing with the IRS. But, there are varying levels of ownership and control that you can utilize to reduce the amount of information you must provide the US government.

For example, maybe you can structure a joint venture between an offshore corporation you own and your non-US partner’s corporation. In this way, you can bring in to your entity only what you wish to report to the IRS, possibly an amount which will match up with the Foreign Earned Income Exclusion.

Next, consider your filing obligations prior to completing your incorporation. Portions of IRS Form 5471 are required of any US person owning or controlling 10% or more of the stock and your reporting obligations increase as your ownership increases. For this purpose, a US person is a US citizen or resident and the 10% ownership requirement is defined as follows:

  1. 10% or more of the total value of the foreign corporation’s stock or
  2. 10% or more of the total combined voting power of all classes of stock with voting rights.

This is to say that US person or persons may own 9% of the company and have no IRS Form 5471 reporting obligation. If you find yourself in a partnership where you may choose to hold 15% or 9%, then it may be in your best interest to hold 9%. Also, you may benefit from the use of option purchase agreements, or other forms of contract, that do not impart ownership or control of the business.

If you own or control 10% or more of the stock of a foreign corporation, but not more than 50%, then you have reduced IRS Form 5471 reporting requirements and you may pay less in US taxes. Again, if you have the option of taking 50% or 51% of a venture, with the balance going to a non-US person, you might elect 50% to minimize your filing and paying obligations.

In the year you form the company, or acquire your 10%+ interest, you must file a full tax return for your offshore corporation on IRS Form 5471, reporting ownership, transfers, income, expense and a balance sheet. In subsequent years, you need only provide the following:

  1. The identifying information on page 1 of IRS Form 5471, not including Schedule A,
  2. Report special ownership interests the company may have, such as in trusts, other foreign entities, cost sharing arrangements, or other complex holdings reportable on Schedule G.
  3. IRS Form 5471 Schedule O, reporting the names of US officers, directors and shareholders, as well as transfers of stock.

In most cases, the Form 5471 return due for a company with US shareholders owning and controlling 50% or less is quite simple in year two and beyond. It should be a mere formality with no income and expense or balance sheet information required.

By contrast, the return due for a company which is controlled by US persons is quite complex and imparts filing obligations on everyone, including US shareholders who are not involved in the business.

When US persons own more than 50% of an offshore company, that entity is classified as a Controlled Foreign Corporation (CFC) by the IRS. As such, a full corporate tax return, with balance sheet, retained earnings statements, income and expense report, and a host of other information is required. The return consists of IRS Form 5471, as well as Schedules A, B, C, E, F, G, H, I, J and M. I won’t go in to each, so please take my word that preparing this monstrosity is a lot of work.

  • If you are a shareholder in a CFC, but not involved in the business,  you must file IRS Form 5471, along with Schedules G, H, I, and J. For additional information, see Category 5 filers.

More importantly, when an offshore company is classified as a CFC, it is unable to retain certain types of income. As such, these profits or transactions must be reported by the shareholders and taxed in the US, just as they would be with a US LLC or S-Corporation, regardless of whether any money is distributed.

CFC Income, or Subpart F income as it is commonly referred to, includes the following:

  1. Certain types of insurance income;
  2. “Foreign base company income,” which covers certain dividends, interest, rents, royalties, gains and notional principal contract income; income from certain sales involving related parties; income from certain services performed outside the CFC’s country of incorporation, for or on behalf of related parties; and certain oil related income;
  3. Income connected with certain sanctioned countries;
  4. Income from operations in which there is cooperation or participation in an international boycott of Israel; and
  5. Illegal payments made to a foreign government or agent.

Obviously, item two above is the one relevant to most business owners. The bottom line with this clause is that the shareholders of a CFC must pay tax in the US on passive income and related party transactions, where, had they been shareholders in a company with 50% or less US ownership, no such tax would have been due.

Finally, as a CFC, you may be limited in your ability to retain earnings and profits which result from loans or other debt obligations of US shareholders. This is true even if those profits are the result of an active business, rather than the passive income listed above. For additional information on this, and other CFC issues, see the IRS Audit Guide.

So long as you have US partners, there are a number of tax planning options for those operating a business offshore. We at Premier can assist you to structure such a business and keep it in compliance with US authorities. For additional information, and a free confidential consultation, please contact me at info@premieroffshore.com or call (619) 483-1708.

Dealing with the IRS

Let’s say you have filed all of your delinquent returns, and the foreign-earned income exclusion, along with the other suggestions in this book, and did not eliminate your entire U.S. tax bill. Now the IRS is at your door…what should you do?

Step One: Know your risks

First, you must understand that the IRS can levy your U.S. bank account, and possibly your foreign bank accounts, put a lien on any real estate in the United States, and possibly take your real estate outside of the U.S.

Levy: A Tax levy, under United States Federal law, is an administrative action by the IRS under statutory authority, without going to court, to seize property to satisfy a tax liability. A levy is generally used to take money out of your bank account.

Lien: A tax lien is a lien imposed by the IRS upon real estate or other property to secure the payment of taxes. It may allow the IRS to seize your property. If you sell the property, the proceeds from the sale go first to the IRS to settle your debt, and then the remainder comes to you. An IRS lien comes after any preexisting liens, such as a first or second mortgage.

Here are several questions to consider if owe money to the IRS:

  • Did you know that the IRS can levy your foreign bank account if your bank has a branch in the U.S.?
  • Did you know that the IRS may be able to levy your paycheck if your parent company is a U.S. entity?
  • Did you know that the IRS can seize real estate in certain countries, such as France?
  • Did you know that moving money out of the U.S. to avoid an IRS levy, even if you live abroad, can be a crime?
  • Did you know that failure (refusal) to pay taxes can be a crime, in very specific circumstances?

Once your debt to the IRS becomes final and payable, the Service will attempt to mail four collection letters demanding payment. After sending those letters, whether or not you received them, the IRS can levy any U.S. bank account. This means they can take up to the amount of the debt out of your account(s). For example, if you owe $30,000, and you have $20,000 on the bank, they get $20,000. If you owe $30,000, and have $35,000, they get $30,000.

In addition, the IRS can levy any foreign account, so long as your bank has a branch in the U.S. For example, if you are living in Mexico, and banking with HSBC, the IRS can issue a levy to a U.S. branch of HSBC, and it must be honored by the branch in Mexico…and your money is gone.

Of course, this can be avoided by banking with institutions that do not have branch offices in the United States.

Second, the IRS can take real estate in the U.S. or real estate in certain foreign countries. The IRS can seize property in any country where such a taking is provided for in the treaty, known as a Mutual Collection Assistance Requests (MCARs) clause. There are currently five treaty countries with which the IRS has ongoing programs for MCARs that may involve seizure and sale.

Third, the IRS can levy a bank account, or garnish your wages (take money out of your paycheck) in most countries with which it has a MCARs.

This means that anyone living in a MCARs country is at risk of having their assets seized, just as if they were living in the United States. The treaty partners and types of taxes covered for collection are as follows:

    • Canada — All taxes
    • France — Income, Estate and Gift, Wealth and other specified taxes
    • Denmark — Income and other specified taxes
    • Sweden — Income and other specified taxes
    • Netherlands — Income and other specified taxes

Note: It is very rare for the IRS to seize real estate, especially one’s primary residence. This only happens after the IRS exhausts every other collection alternative, and the taxpayer refuses to cooperate. If you owe money, and can’t afford to pay, a tax attorney can negotiate a settlement that both you and the IRS can live with. As long as clients are honest and cooperate, the process is surprisingly painless. It is those who are unwilling to cooperate, or are too scared to do so, that get hit the hardest by the IRS.

Step Two : Negotiate

There are two basic options for those who owe the IRS, and are unable to pay:

1) An installment agreement; or

2) Offer in Compromise.

In an installment agreement, you agree to pay what you can afford each month, and the IRS agrees to stop collection actions while you make these payments. The IRS has 10 years to collect from you, thus your installment agreement can go on for several years.

In an Offer in Compromise, or OIC, you and the IRS agree to settle your debt for one lump sum, or payments over a few months. Let’s look at the OIC process in detail.


Everyone is well aware of the U.S. credit crunch, plummeting home values, and the generally tough economic situation. At the same time, the U.S. government is running at a staggering deficit and looking to the Internal Revenue Service (IRS) to bring in more cash by stepping up audits and collections.

Put simply, an OIC is an offer to settle your IRS tax debt for less than the total obligation because you cannot pay the debt in full over the “collection period.” Before you can request an OIC, all of your tax returns must be filed and you must pay a deposit of 20% of your offer amount.

Collection Period: In most cases, the IRS has 10 years to collect on a tax debt after it has been assessed. A debt is assessed when you file your returns, the IRS files returns for you, or an audit is finalized.

A settlement can be made in one lump sum, or over a number of months. However, it is more difficult and costly to get OICs approved that will pay over time, so a lump sum payment is the most practical option for most taxpayers.

During the OIC process, your objective is to convince the Service that you are paying them something that they would not otherwise get. To prove this claim, you are required to complete a detailed financial statement, listing all of your income, bank accounts, and assets. If your assets exceed your debt, your offer will not be accepted.

If you do not have sufficient assets to satisfy the debt, your income is compared to your allowed expenses to calculate your offer amount. For example, in 2012, a family of four living in San Diego, California is allowed to spend $3,142 per month for housing and utilities. The same family of four, living in Armstrong County, Texas, would be allowed only $1,427 per month, and $5,625 in New York County, New York.

If your income exceeds your allowed expenses, the difference, times 48 months, is added to your assets to determine your total offer amount.

For example, if you owe $100,000 to the IRS, the equity in your home, your only asset, is $20,000, and your net income after allowed expenses is $1,000 per month, your total offer amount is $68,000 ($1,000 x 48 = $48,000 + $20,000), or 68% of the debt.

Expats & Allowed Expenses: When negotiating with the IRS, you are allowed to spend fixed amounts on housing, utilities, automobile, health care expenses, food, clothing, and other living expenses. Collection Financial Standards are published for U.S. residents, but none have been created for those living abroad. Therefore, every aspect of an expats financial statement must be negotiated. For more information on the Collection Financial Standards, visit www.irs.gov/individuals/article/0,,id=96543,00.html


Let’s say you owe $10,000, $30,000, $100,000 or more to the IRS and your assets exceed your debt. You are working full time abroad, but you have no savings to pay off the IRS. Can you pay off your debt over time?

Yes. In fact, almost every client onshore or offshore client I have worked with in the last 10 years, who has requested an installment, has been approved…eventually. The trick is always the same: getting to a number that both you and the IRS can live with. 

If you owe taxes to the IRS, but can’t afford to pay it off all at once, and you don’t qualify for (or can’t afford) an Offer in Compromise, then you can usually set up a payment plan, called an “Installment Agreement” in IRS lingo. The amount you will need to pay each month is based on a number of factors, including:

  • Your income;
  • Your assets;
  • The amount you owe;
  • Your actual expenses;
  • Your allowed expenses; 
  • The remaining collection statute of limitations; and
  • Whether or not you can afford to pay off the debt in full over the collection statute. 

The key to setting up an Installment Agreement is the analysis of these and other factors, and thereby proving to the IRS how much you can afford to pay each month.

Here are the basics of an IRS Installment Agreement.

The IRS will enter a written agreement with you which requires installment payments based on the amount you owe and your ability to pay it within the period of time the Service has to collect from you (the “statute of limitations,” as it is called). The IRS has 10 years to collect from you once you filed a return. When the 10 years are up, the debt is canceled and you get a fresh start.

Depending on the amount of tax due, there are different options within the program (see below).

To apply for an Installment Agreement, you usually need to file Form 9465 and Form 433-A or Form 433-F (versions of the IRS Financial Statement, the key form when dealing with IRS collections at any level). If you are self-employed, or own a business, you may also need to file Form 433-B. A few people also need Form 433-D. If your Agreement is accepted, you will be charged a fee of $105 for a new agreement, or $45 for a reinstated agreement.

What is a ‘reinstated agreement,’” you’d ask.

An Installment Agreement is binding. You must pay the amount agreed-upon on time, every month of the year. If you skip a payment, you usually have 30 days to catch up. If you are not able to get current with your payments, the Agreement is canceled. You may apply for a new Agreement, but your new proposal may be met with skepticism and can even be rejected. Worse, you must provide updated financial information, which may have very dire consequences if your income has increased or the person reviewing your data is less accommodating than the prior agent. If you’re lucky and it’s accepted again, then you’ll have a “reinstated agreement.”

There are two types of Installment Agreements, mandatory and discretionary. A “mandatory” agreement means that the IRS is required to accept the Agreement you propose if:

  • You owe less than $10,000 (exclusive of interest and penalties);
  • You’ve filed your tax returns and paid your due taxes on time during the past five years;
  • You haven’t entered another Installment Agreement during those past five years;
  • You demonstrate that you can’t pay the tax in full;
  • You agree to pay the full amount you owe within a period of three years;
  • You guarantee that you’ll comply with the tax laws during the term of the Installment Agreement.

If you meet all these criteria, the IRS doesn’t have the right to reject your Installment Agreement. An additional advantage of this type of agreement is that it doesn’t require the same in-depth financial verification that a normal application does.

If you owe more than $10,000, you need a “discretionary” Installment Agreement, which means that the IRS can deny you a payment plan if it deems it unsatisfactory. The IRS has to consider your Installment Agreement and will request you to prepare a Financial Statement (Form 433-A or Form 433-F). If the IRS concludes that more information is needed to evaluate the proposal, then it can request you to provide supporting documents or other proof of income and expense. If not supplied, the IRS can reject your application.

During the processing of your Installment Agreement (until you receive the notice about the result of your application) your stress level will lower considerably as the IRS is not allowed to collect from you. If your IRS installment agreement request is rejected, your case will be on hold for 30 days, giving you time to appeal.  If you file a timely appeal, then the IRS can’t touch your property or money during the pendency of the appeal.

How much of my debt will I pay through an Installment Agreement?

The answer is that it depends on your ability to pay, the assets you have available, and the collection statute of limitations. If you have sufficient means then the IRS will require a Full-pay Agreement. This is when you pay your tax debt in full, including interest and penalties, over a period of time.

A Full-pay Installment Agreement may be for a fixed monthly amount, or it may increase at predetermined intervals. In each case, it will pay off the debt during the collection statute of limitations. 

An IRS Installment Agreement where you pay a fixed amount each month until the debt is paid in full is easy to understand. An Installment Agreement where your monthly payments increase over time takes a bit of explaining.

As you know, your ability to pay the IRS is based in part on your income vs. your allowed expenses. When your actual expenses exceed your allowed expenses, you are generally given time to modify your lifestyle.

For example, you may be given six months to find a lower-cost apartment. If your current apartment exceeds your allowed rental expense by $400, the IRS may set up an Installment Agreement that will increase by $400 in six months’ time.

Another example is where your allowed expenses go down. The most common situation is where your automobile will be paid off, thereby reducing your allowed expenses. If your auto payment is $550 and your car will be paid off in eight months, you might set up an Installment Agreement that will increase by $550 in eight months’ time.


Warning: What if you have unexpected repair bills, or need to purchase another car when this one is paid? You might be forced to default on the IRS Installment Agreement and need to start the process over…something everyone dreads.Careful analysis of your current and future finances, along with a solid understanding of IRS practice and procedure, prior to applying for an Installment Agreement can prevent these and other problems.For example, as a result of planning ahead, you might decide to purchase a new car, with a longer payoff period, before submitting your request.

What if I can’t afford to pay off the IRS in full?

In the case you (1) do not have sufficient income to support a Full-pay Agreement, and (2) have no significant equity in assets or cannot sell or borrow against assets due to the fact that selling them will cause an undue hardship, then the IRS will grant a Partial-pay Agreement and you’ll pay off only a portion of your debt within the statute of limitations, with the remaining debt being canceled.

However, if you are granted a Partial-pay Agreement, you must provide updated financial information every two years to prove your continuing financial hardship.· If your income has increased, or your allowed expenses have decreased, you will be required to increase your monthly payment.

Still, there’s a third situation. You pay zero dollars. Is that possible? Sure. Basically, when you cannot afford an Offer in Compromise, you have no assets to use to pay the IRS, and your income equals your allowed expenses, you can’t afford to pay IRS anything.

A taxpayer in an Installment Agreement at zero dollars is referred to as being “temporarily uncollectable,” with temporarily being the operative word here.· As with a Partial-pay Installment Agreement, the IRS will review your financial situation periodically to see if it can start collecting from you. If your financial situation doesn’t improve and the statute of limitations runs out, then your debt is eliminated. In other words, if you prove to the IRS that you are uncollectable over the entirety of the collection statute of limitations, you have paid nothing and your debt expires.

IMPORTANT NOTE: While you are making installment payments to the IRS, penalties and interest accrue on the unpaid balance. Essentially, you are locked into a late-payment penalty of one quarter of a percent a month plus interest on the unpaid amount. Taken together, the cost comes at around 10% a year. It’s still less than the interest you pay on your credit card, but you need to think before you commit.

What if my Installment Agreement is rejected?

This may happen in one of the following cases:

(1) The information included in Forms 433-A or 433-B is incomplete or untruthful. If the IRS discovers that you have property or income not recorded on the forms then it will reject your application. Be careful here..your financial statement is signed under penalty of perjury, so it is very important to be truthful and very detailed in the information you provide to the government.

(2) The IRS deems some of your living expenses unnecessary. If you owe money to the government but nevertheless send your kids to private schools or drive expensive cars, then be prepared to get no deal at all. The IRS expects you to have quite a frugal life while paying off your debt.

(3) You defaulted on a prior Installment Agreement. It’s a matter of trust…if you’ve once defaulted on your payments then the IRS will think twice whether to grant you a second chance.

If your Installment Agreement is rejected, then you can appeal the decision. If the IRS sees your efforts to pay off your debt then your application may be reconsidered.

What if I need professional help with filing an Installment Agreement?


So, why do you see so many claims on the Internet and television promising to settle your tax debt for pennies on the dollar? Because there are settlements like that, which are then used by a few unscrupulous promoters to mislead people into spending thousands of dollars to only have their OICs rejected.

Take the example above, but assume the tax debt is $1 million. It will still settle for $68,000, or about 15%.

If that same family owes $1 million, has lost their home, and their income does not exceed their allowed expenses, or the breadwinner is permanently disabled and unable to work, then total offer amount might be $1,000. This is a dream scenario for any national OIC marketing firm…the perfect client who can be used in their multi-million dollar advertising campaign!

I have had a few such clients over the years. For example, a 72-year-old retired person, who was living with family and on Social Security only, settled his debt of $150,000 for about $2,000.

Before hiring anyone, especially a national firm, you should check them out on the Internet. Here are a few suggestions:

  • Click here to go to a review of American Tax Relief by the Better Business Bureau.
  • Click here for a review of JK Harris by the Better Business Bureau. Click here to read what consumers have to say about JK Harris.
  • Click here for a review on Roni Lynn Deutch by the Better Business Bureau. Click here to see what consumers have to say about Roni Deutch.
  • Click here to read a review of TaxMasters, Inc. by the Better Business Bureau. Click here to read what consumers have to say about TaxMasters. For more opinions on TaxMasters, click here and here.
  • Click hereto see what consumers have to say about Power Tax Relief. Click here to read a review of Power Tax Relief by the Better Business Bureau.

NOTE: Government figures show that 75% of Offers in Compromise are returned due to forms being filled out incorrectly; and of the 25% that are processed, approximately 50% of them are rejected. Add to this the complexities of expat negotiations, and it is clear quality representation is required…just be careful!

When do I need Help?

Many clients ask, “Do I need an attorney to help me deal with the IRS?” That’s a hard question and depends on your ability to negotiate, organize, and handle IRS paperwork. Some people are much more capable than others when it comes to handling their tax matters.

My standard answer is this:

  1. If you owe the IRS $24,000 or less, and can afford to pay $500 per month, just call them up and make that offer. If it is accepted, as it usually is, you do not need professional help.
  1. If you owe $24,000 to $99,000, you have an average sized case that will usually be handled by a centralized collection unit. While this size accounts for about half of my collection cases, they are easier to handle than larger cases…thus, we charge a lower fee.
  1. If you owe $100,000 or more, you have a large case and can expect the IRS to be very aggressive in collecting from you. I suggest that anyone with a debt in excess of $100,000 seek legal counsel immediately.
  1. Finally, you should decide if you need representation before contacting the IRS. It is very difficult to overcome mistakes and I generally do not take on cases after the documents have been filed. It’s like coming in to the game down by 21 points and being asked to bring the team back with five minutes to go.

Taxpayer’s Bill of Rights

In tough economic times, many business owners and self-employed people find it difficult or impossible to pay their federal taxes. When the debt is too large to pay, you then get the joy of negotiating with the Internal Revenue service.

Note: Of course, everyone has a hard time paying their taxes. Business owners and the self-employed are more likely to have large debts because many do not have taxes withheld from their paychecks, do not make quarterly estimates, and hope that there is enough cash in the business at the end of the year to keep the IRS at bay.

The following is a list of protections that taxpayers have when facing the IRS, known in the industry as the “Taxpayer’s Bill of Rights.” The first step in dealing with the IRS is to know these basic rights.

  1. Innocent Spouse Relief (Publication 971):
    1. Is available for all understatements of tax (previously, only substantial understatements) attributable to erroneous items (previously, only grossly erroneous items) of the other spouse.
    2. You must file this claim within two years of the IRS beginning collection action.
    3. You must show that the innocent spouse did not know and had no reason to know about the underpayment of taxes.
    4. Innocent Spouse can be claimed for any tax liability arising after July 22, 1998 and any tax liability unpaid as of that date.
    5. If Innocent Spouse is claimed and rejected, you can file a petition and go to tax court.
    6. The IRS can grant equitable relief to taxpayers who do not satisfy the above tests.
    7. If you filed a joint return, you can use innocent spouse as long as: 1) you are divorced or legally separated, or b) have been living apart for more than one year.
  1. The IRS must abide by the Fair Debt and Collections Practices Act, which includes not communicating with you at an inconvenient time or place. This right basically protects against harassment.
  1. The 10-year statute of limitations period on collection may generally not be extended if there has been no lien on any of the taxpayer’s property.
  1. The IRS must give you an installment agreement if:
    1. You owe less than $10,000,
    2. In the previous five tax years you have not 1) failed to file a tax return, 2) failed to pay any tax required to be shown on a return, and/or 3) entered into an installment agreement, and you
    3. Agree to full payment within three years.
  1. A supervisor must approve the issuance of a Notice of Lien or Levy or seizing of property.
  2. The IRS must notify you within five business days after the filing of a Notice of Lien and must include certain information in the notice, such as the amount of the tax and your appeal rights.
  1. Anyone who will be affected by the filing of a lien is entitled to a fair hearing with an Appeals officer who had no prior involvement with the unpaid tax that gave rise to the filing of the lien.
  1. You can get a certificate of discharge of a lien by depositing the amount in question with the IRS or you furnish a bond. You then have the right to sue to dispute the tax due.
  1. The IRS must release a wage levy once it is determined that your outstanding tax liability is uncollectible. This basically means that the IRS determines that you do not have the financial resources (cash flow after allowed business and personal expenses and assets) to pay the debt.
  1. You and third parties can sue for money damages for reckless or intentional disregard of the statutory collection provisions. This has been made easier because it includes negligence on the part of an IRS employee. You must first follow administrative remedies and you are limited to $100,000 for negligence and $1 million for intentional or reckless disregard.
  1. The IRS must notify you, 30 days before filing a levy, that you have a right to a hearing.
    1. You can then request an Appeals officer hear the case before the levy.
    2. You cannot challenge the underlying tax unless you had no previous opportunity to do so.
    3. If not resolved, you have 30 days to appeal to the U.S. Tax Court or Federal Court.
  1. Standards are provided exempting some personal property and tools of the trade from levy.
  1. Property can’t be sold below the property’s minimum bid price.
    1. Where no one is willing to pay the minimum bid price, the IRS can return the property or it is deemed to have paid that price.
    2. Generally, this is 80% or more of the forced sale value.
  1. If the amount of the debt is less than $5,000, the IRS cannot take your primary residence.
  1. The IRS cannot seize your principle residence without prior court approval.
  1. The IRS cannot reject an Offer in Compromise from a low income taxpayer solely on the basis of the amount of the offer.
    1. This does not apply to the self-employed.
  1. While you have an Offer in Compromise pending, and 30 days thereafter, the IRS cannot take your property or levy your bank account.

For additional information, please refer to these IRS publications: