Tag Archive for: Audits & Tax Issues

The IRS is Targeting Puerto Rico Act 20, 22 and 60

The IRS is Targeting Puerto Rico Act 20, 22 and 60

The IRS is targeting individuals who have taken advantage of tax incentives under Puerto Rico Act 20, 22 and 60, which exempts from taxation certain business and investment income of recently relocated Puerto Rican residents. The IRS has intensified its focus on individuals who may be erroneously reporting US source income as Puerto Rico source income to evade US taxation.

Act 20 and 22 became Act 60 in Puerto Rico on July 1, 2019. It was part of a larger bill that consolidated several tax incentive programs into a single law, known as the Puerto Rico Incentives Code 60.

Act 20 was originally enacted in 2012, and it offered tax breaks to businesses that exported services from Puerto Rico. Act 60 expanded the scope of Act 20 to include individuals who relocate to Puerto Rico and become bona fide residents. These individuals are now eligible for a variety of tax breaks, including exemptions from federal and local income taxes on certain types of income.

Act 22, also known as the Individual Investors Act, is a Puerto Rican law that provides tax breaks to individuals who relocate to Puerto Rico and become bona fide residents. The law exempts these individuals from Puerto Rico income taxes on all passive income realized or accrued after they become residents. Passive income includes interest, dividends, rental income, and capital gains.

To qualify for Act 22, individuals must meet certain requirements, including:

  • They must be U.S. citizens or lawful permanent residents.
  • They must not have been residents of Puerto Rico for the 10 years preceding their move.
  • They must spend at least 183 days per year in Puerto Rico.
  • They must make a minimum investment of $100,000 in Puerto Rico.
  • Act 22 has been controversial since it was enacted in 2012. Some people argue that the law benefits the wealthy at the expense of the poor, while others believe that it has helped to boost the island’s economy.

Here are some of the benefits of Act 22:

  • 0% tax on interest, dividends, rental income, and capital gains.
  • No property taxes on primary residences.
  • Reduced corporate income tax rates.
  • Reduced capital gains tax rates.
  • No inheritance tax.

The passage of Act 60 was seen as a way to attract businesses and individuals to Puerto Rico, and it has been credited with helping to boost the island’s economy. 

The IRS has also been investigating individuals who have used Puerto Rico’s Act 22 as a tax saving tool for cryptocurrency trading and other activities. In January 2021, the IRS launched a campaign targeting such taxpayers.

The IRS’s focus on Puerto Rico tax incentives is part of a broader effort to crack down on tax evasion and increase revenues. The IRS has also been targeting individuals who have used other US territories, such as the US Virgin Islands, to reduce their US tax bills.

Here are some key takeaways from a recent Bloomberg article. Also, here is a summary from Cointelegraph.

  • The IRS is targeting individuals who have taken advantage of tax incentives under Puerto Rico Act 20, 22 and 60.
  • The IRS is also investigating individuals who have used Puerto Rico as a tax haven for cryptocurrency trading and other activities.
  • The IRS’s focus on Puerto Rico tax incentives is part of a broader effort to crack down on tax evasion.
  • Individuals who are considering taking advantage of tax incentives in Puerto Rico or other US territories should be aware of the potential legal risks associated with non-compliance.
  • It is essential to seek professional advice to ensure compliance with tax laws and regulations.

Individuals who are considering taking advantage of tax incentives in Puerto Rico or other US territories should be aware of the potential legal risks associated with non-compliance. It is essential to seek professional advice to ensure compliance with tax laws and regulations, which so many have failed to do.

Here are some ways that taxpayers might abuse Act 22/60:

  • Claiming to be a resident of Puerto Rico but not fully relocating. This could involve spending less than the required 183 days per year in Puerto Rico, or maintaining a home and other ties to the mainland United States.
  • Claiming they purchased the asset/crypto after they moved to the island when they bought it before they moved. This could involve claiming that a stock or other investment was purchased after the taxpayer moved to Puerto Rico, when it was actually purchased before the move.
  • Setting up shell companies or other entities in Puerto Rico to funnel income through. This could involve creating a company in Puerto Rico that is owned by a taxpayer who is not a resident of Puerto Rico, or using a Puerto Rican trust to hold assets that are not actually located in Puerto Rico.
  • Using Act 22 to avoid paying taxes on income that is not actually passive. This could involve claiming that income from a business is passive when it is actually active, or claiming that income from a sale of property is capital gains when it is actually ordinary income.

The bottom line is that the tax benefits of moving to Puerto Rico are excellent and perfectly legal. But, shockingly, people have found ways to abuse the system. They want to live in the US but not pay US taxes. This is a road to trouble. If you want the tax benefits of Puerto Rico you must commit to living on the island. 

In closing, I am often asked why Puerto Rico is allowed to make its own tax laws which superseded US Federal tax law. Here’s the reason: 

Why Americans Should Consider Moving Their Cryptocurrency Offshore

The IRS Targets Crypto Investors – Why Americans Should Consider Moving Their Cryptocurrency Offshore

In a recent legal development, a federal court has ordered the cryptocurrency exchange, Kraken, to turn over account and transaction information to the Internal Revenue Service (IRS). This move by the IRS is intended to uncover whether any of Kraken’s users underreported their taxes, highlighting an increasingly intrusive regulatory environment for cryptocurrency holders in the United States​1​.

The IRS petitioned the court in the Northern District of California to issue this order, following Kraken’s settlement of charges related to a violation of securities law. The tax agency alleged that it issued a summons to Kraken in 2021, which the exchange failed to comply with, sparking the IRS’s interest in investigating the tax liabilities of users who transacted in crypto from 2016 to 2020​1​.

Under the court’s order, Kraken is required to provide the IRS with comprehensive data about users who transacted more than $20,000 in a calendar year. This data includes the user’s name, birthdate, taxpayer identification number, address, phone number, email address, and more. Additionally, Kraken must provide blockchain addresses and transaction hashes that are part of the transaction data, and it may also produce raw data for the IRS​1​.

While this order might appear to be a necessary step in ensuring tax compliance, it has raised concerns about the extent of privacy cryptocurrency users can expect. Despite the court’s denial of several IRS requests, such as receiving employment information and source of wealth from Kraken, this decision underscores the broad power the government can exert over cryptocurrency exchanges and their customers in the name of tax enforcement​1​.

In light of these developments, American cryptocurrency holders should consider moving their assets into cold storage or onto an international exchange. Cold storage, a method of holding cryptocurrency offline, would allow holders to maintain their privacy and control over their crypto assets. International exchanges, particularly those in jurisdictions with more favorable cryptocurrency regulations, offer an alternative to U.S.-based exchanges like Kraken. While these options come with their own considerations, such as the need for robust security measures in the case of cold storage or the implications of international tax law, they represent potential paths for those seeking to maintain greater privacy and control over their cryptocurrency investments.

In conclusion, while tax compliance is unquestionably important, the recent court order involving Kraken serves as a reminder of the potential privacy trade-offs involved in using domestic cryptocurrency exchanges. By considering alternatives like cold storage or international exchanges, American cryptocurrency holders can take steps to protect their privacy and control over their assets in an increasingly regulated U.S. crypto landscape.

IRS and Puerto Rico

A Terrible Tax Court Case for Puerto Rico Act 20, 22, and 60 Residents

In this post, I look at the recent US Tax Court Case Tice v IRS (April 10, 2023). This USVI case has major implications for those of us living and working in Puerto Rico under Acts 20, 22, and 60 (the more recent version of the law). Anyone in Puerto Rico using these tax decrees must be familiar with this case and take action immediately. 

Case Summary:

In TICE v. COMMISSIONER OF INTERNAL REVENUE, the United States Tax Court considered the timeliness of a notice of deficiency for a taxpayer who claimed to be a resident of the U.S. Virgin Islands (USVI) for 2002 and 2003. Petitioner David W. Tice argued that the notice of deficiency issued in 2015 was untimely because the three-year period of limitations in section 6501(a) began when he filed his returns with the Virgin Islands Bureau of Internal Revenue (VIBIR). The Internal Revenue Service (IRS) maintained that the filing with the VIBIR does not trigger the statute of limitations unless the taxpayer was a bona fide resident of the USVI under section 932.

The Tax Court held that a taxpayer’s filing of returns only with the VIBIR does not trigger the statute of limitations under section 6501(a) unless they are bona fide residents of the USVI to whom section 932(c) applies. As a taxpayer other than a bona fide USVI resident, the petitioner did not trigger the statute of limitations under section 6501(a) by filing returns only with the VIBIR; therefore, the notice of deficiency could be issued “at any time” under § 6501(c)(3). The court rejected the petitioner’s argument that merely claiming to be a bona fide USVI resident is sufficient to qualify for the single filing regime under section 932(c).

Furthermore, the court dismissed the petitioner’s alternative arguments that the Treasury violated the Administrative Procedure Act and the Fifth Amendment to the U.S. Constitution by giving taxpayers the option to apply the otherwise prospectively effective rule in Treasury Regulation § 1.932-1(c)(2) for tax years ending on or after December 31, 2006, but not for the years in issue. The court found that the petitioner failed to show that taxpayers with different open tax years were similarly situated or that the Treasury’s explanation for its action was unsatisfactory.

English Translation:

The IRS generally has three years to audit your tax returns and claim you owe them money. This three-year period starts when you file your return and can become six years in certain cases. 

The problem is, if you never file a tax return, the three years never start. For example, if you don’t file for ten years, and then file all ten years of returns tomorrow, the IRS has three years from tomorrow to audit all ten years of returns. That is to say, the three-year audit clock starts from the date the tax return was filed or the due date of filing, whichever is later.

Tice means that filing a tax return with the US Virgin Islands, and presumable filing a return in the US territory of Puerto Rico, does not start the three-year clock. Only filing a Federal tax return with the Internal Revenue Service starts this three-year statute of limitations. 

It also means that the IRS has an unlimited amount of time to contest your Act 20, 22, or 60 in Puerto Rico if you don’t file a US return. The Feds could come back on you 15 years from now claiming you owe them money, and the burden of proving that you don’t will likely be on you… you’re guilty until proven innocent after an assessment. Will you have the documents and evidence necessary?

Solution for Puerto Rico Residents Under Acts 20, 22 and 60:

So, what can you do so that the IRS sword isn’t hanging over your head forever? File a US tax return, even if you don’t think it’s necessary (you have no US source income). File something, anything, to get the statute of limitations on an audit started. 

Many of us living and working in Puerto Rico under a tax decree need to rethink our tax strategy and filing obligations under Tice. You should consult with a tax expert to prepare a US return sufficient to be considered “filed” and not discarded as frivolous.

IRS Offers Expatriate Tax Deal

IRS Offers Expatriate Tax Deal – Expatriate Now!

In this post, I’ll look at the 2020 IRS offers to low and medium-income expatriates – US citizens that wish to give up their US passports and escape the IRS once and for all. This expatriate tax deal is very limited in scope. But, if you qualify, you should act now to expatriate! 

Editor’s Note: This section applies to those who have given up their US citizenship or those who plan to give up their US citizenship. This tax offer is made to persons who expatriate from the United States. 

I mention this because, the term “expat,” commonly referrers to US persons living outside of the United States. Here, the term expatriate means someone who has gone through the process of renouncing his or her US citizenship. 

With that said, here’s the 2020 IRS offer to expatriates: 

Certain individuals who expatriate from the United States may be able to avoid the exit tax and other outstanding tax liabilities using the procedures the IRS recently outlined its website and announced in News Release IR-2019-151.

This tax deal applies to individuals who gave up or will give up their U.S. citizenship after March 18, 2010, and meet a number of other criteria listed below. Native-born or naturalized U.S. citizens generally may voluntarily relinquish their citizenship for reasons and under procedures listed at 8 U.S.C. Section 1481(a).

In most cases, this means that make an appointment at a US consulate and formally renounce your US citizenship. You must also turn in your passport. 

This means that you must have a second passport in hand before you give up your US citizenship. It’s impossible to become “stateless.’ While this may seem obvious, you’d be surprised how many calls I get regarding expatriation from people who do not yet have a second passport and second citizenship.  

Per the US tax code, expatriates must comply with all federal tax requirements for the year of expatriation and for the five immediately prior tax years. In addition, Sec. 877A imposes a tax on “covered expatriates” that deems most property as sold for its fair market value on the day before the day of expatriation. If the net gain is over $725,000 (for 2019), the gain over this amount is includible in income for tax year 2019 (the 2020 number is not available at the time of this writing). 

A covered expatriate is anyone who:

  1. Has an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount ($168,000 for 2019);
  2. Has a net worth of $2 million or more; or
  3. Cannot certify under penalty of perjury that he or she has met all applicable tax requirements for the five preceding tax years or fails to submit evidence of compliance the IRS may require. This certification can be made with Form 8854, Initial and Annual Expatriation Statement.

That is to say, you’re a covered expatriate regardless of your net worth and income if you cannot make the certification. In my experience, individuals who have not filed their returns, or go through the expatriation process without the assistance of a tax expert, become covered individuals under #3. 

That is to say, there is no requirement to be in compliance with your US tax obligations before you give up your citizenship. So long as you have a second passport, you can make an appointment and give up your US passport. 

However, if you do this without first satisfying your IRS obligations, you become a “covered person’ by default. This tax liability will follow you into your new life. Unless and until you go through the formal process, you will never be free of the IRS. 

Also, international banks will only consider you a non-US person after you go through the formal process and receive a Certificate of Loss of Nationality from a US Embassy. This letter, which costs $2,350, must be provided to your international bank to remove your account(s) from their FATCA reporting systems. 

That is to say until you receive a Certificate of Loss of Nationality, banks will consider you a US citizen and report your accounts to the IRS under FATCA. 

Under the new deal for expatriates, individuals who meet the requirements will not be considered covered expatriates and will not be liable for any unpaid taxes and penalties for the year of expatriation and previously. As stated above, the expatriation must have occurred after March 18, 2010.

Also, for the six tax years at issue (the year of expatriation and the five immediately prior years), any failure to file required tax returns and pay taxes and penalties for the years at issue must have been due to the taxpayer’s nonwillful conduct. 

Required tax returns include income, gift, and information returns (the latter including Form 8938, Statement of Specified Foreign Financial Assets), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR. Nonwillful conduct is that which is due to negligence, inadvertence, mistake, or a good-faith misunderstanding of legal requirements.

In addition, to be eligible for relief, the individual must:

  • Have no filing history as a U.S. citizen or resident (not including Form 1040NR, U.S. Nonresident Alien Income Tax Return, under a good-faith but mistaken belief that the individual was not a U.S. citizen);
  • Meet the above income tax liability limits for covered expatriates for the period of five tax years ending before the date of expatriation and meet the $2 million-net-worth limit at the time of expatriation and when applying for the relief;
  • Have an aggregate US tax liability of no more than $25,000 for the six tax years at issue (after application of all applicable deductions, exclusions, exemptions, and credits, including foreign tax credit and foreign earned income exclusion, but excluding penalties, interest, and the exit tax of Sec. 877A); and
  • Agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns.

The bottom line is that this tax deal for expatriates is meant for those who have lived their entire adult lives outside of the United States and have never filed a US 1040 personal income tax return. The most common example would be someone who has grown up in the UK, has a US passport because his father was a US citizen, has never lived in the US (though, they may have visited), and was unaware of their US tax filing obligations. 

Also, this expatriate tax offer is for lower to middle-income individuals. You must have a net worth of less than $2 million in the year you give up your US citizenship. I guess the IRS figures it’s not cost-effective to chase down those with a net worth of less than $2 million.

Finally, your net US tax due must be less than $25,000 per year. This will depend more on where you live than your net income. Because of the foreign tax credit, someone living in a high tax country such as France, and making $5 million a year, might owe nothing to the IRS when they file their US returns. Conversely, someone living in a zero-tax country, such as Belize, might owe more than $25,000 to the IRS on a salary of $200,000. 

If you meet the qualifications above, and you’re thinking about giving up your US citizenship, now is the time to do it. You should file and renounce during 2020 while the program is still in effect.

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 Bitcoin

The IRS smells blood in the water over Bitcoin!

The IRS smells blood in the water over Bitcoin and it’s coming hard for Coinbase users. The war on cryptocurrency is just getting started and it’s going to get ugly fast. Expect US citizens with US crypto accounts to be put in jail to send a message to the rest of us to fall in line.

The IRS says that only 0.2% of Coinbase users reported a gain or a loss from cryptocurrency on their returns. The government reviewed 500,000 accounts and found only 900 of them had properly reported transactions on their US returns.

The IRS has ruled that Bitcoin and cryptocurrencies are property. That means each and every trade of crypto results in a capital gain or loss that must be reported on Schedule D. Cryptocurrency is treated like stock and not as a currency for US tax reporting.

So, if you bought Bitcoin and exchanged it for Ethereum in your wallet, that trade is taxable. Each time you sell Bitcoin, you have a taxable gain. Anyone who’s buying and selling in their wallet has transactions that must be reported. Every time you use Bitcoin to buy something, you have a taxable transaction requiring you to report the conversion of the crypto into dollars.

Even if you have a net loss, each and every trade must show up on your Schedule D at the end of the year. You also need to keep accounting records to prove your purchase price (basis) and any expenses you incur.

The fact that only 0.2% of users are in compliance has the IRS on the hunt. The Service wants to know about each and every transaction and will make examples of many Coinbase users in 2018. Typical IRS modus operandi is to hang a pelt on the wall in each big city and each State for the press release. Expect the first charges and indictments to be announced around April 10, 2018, just in time for tax filings.

Also, keep in mind that all IRS reporting requirements apply to US Bitcoin transactions. If you pay someone a salary in crypto, you must report it on Form W-2 and withhold the employee’s taxes and pay over federal and state payroll taxes. Doing this will require you to convert from crypto to US dollars, which generates a capital gain.

The same goes for payments to independent contractors. You must file a Form 1099 on any payment of $600 in rents, services (including parts and materials), prizes and awards, or other income payments.

And don’t get your hopes up that Bitcoin in exchange for services will be taxed as a capital gain to the recipient. When you receive crypto for personal services, the coins are magically converted from capital assets to ordinary income in the eyes of the IRS. Thus, you will pay ordinary income tax to the IRS and your state on any Bitcoin earned from work or services.

The last time the IRS was so excited about taking money from it’s citizens was 2008. The Service issued a John Doe summons to offshore bank UBS, just as they did to Coinbase in 2016. When the offshore banking battle was over, the IRS had netted over $10 billion in new taxes, interest, and penalties.

The IRS is really pulling out all the stops in this case. They’ve hired Chainalysis, a provider of Anti-Money Laundering software, to search out Bitcoin users. As reported by Fortune, “In a letter to the IRS, the co-founder of Chainalysis says the company has information on 25 percent of all bitcoin addresses and that it deploys millions of tags to help track and identify transactions.”

The IRS says only 0.2% have reported capital gains on their US tax returns. What should the remaining 99.8% do to minimize risk and tax costs?

If you have unreported crypto gains from 2014 to 2017, you should hire an expert to amend your return. Crypto capital gains are treated like stock transactions, but only a CPA or EA experienced in these transactions is qualified to amend your return.

Amending your returns before the IRS targets you will reduce your risks and penalties. If you’re caught in an audit, expect the full weight of the Service to fall on you.

If you want to maintain some semblance of privacy in your crypto transactions, I suggest you move your coins offshore. Form an offshore LLC, corporation or trust, and open a foreign wallet under that entity. If you need asset protection and estate planning, go with a trust. If you operate a business, use a corporation. Casual investors should form an LLC.

If you’re with Coinbase, you should sell and transfer cash offshore through your bank (a taxable event). If you’re with another firm, you might transfer crypto offshore (usually not taxable).

  • Remember that we’re talking about privacy and asset protection. Moving offshore doesn’t reduce or change your US taxes.  

There are two ways to legally avoid US tax on your Bitcoin transactions. You can invest using a retirement account or you can move to the US territory of Puerto Rico and qualify for Act 22.

If you have a US IRA or 401-K that’s vested, you can form an offshore IRA LLC and move that account offshore. If you’re defined benefit plan can be converted into an IRA, you can also move that offshore. From here you can buy cryptocurrency or any other investment allowed for within the IRA rules.

If you move to the US territory of Puerto Rico, and qualify under Act 22, you will pay zero capital gains tax on your Bitcoin transactions.  Note that this tax deal is only available in Puerto Rico for assets acquired after you become a resident of the territory. It does not apply to your current crypto portfolio.

For more information on Puerto Rico’s unique tax incentive programs, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs. Keep in mind that US citizens are taxed on our capital gains no matter where we live. Foreign countries can’t match Puerto Rico’s offer.

I hope you’ve found this article on why the IRS smells blood in the water over Bitcoin to be helpful. Please contact me at info@premieroffshore.com to be connected to an expert in amending tax returns with crypto gains or for information on structuring your affairs or your retirement account offshore. 

Foreign Base Company Service Income

How to Eliminate Subpart F Foreign Base Company Service Income

In this article I’ll explain how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation.  Subpart F issues are the most common tax planning hurdles to overcome when you have a division of a US company operating abroad. Subpart F applies to income of a Controlled Foreign Corporation (CFC).

This article is focused on service income of a foreign division. Service income is earnings and profits generated by work done in a foreign country or a US territory. Service income is not profits from the sale of a physical good into the United States market.

This analysis applies to a business setup in a low tax country, such as Panama, or in the US territory of Puerto Rico under Act 20. For a basic summary of offshore and Puerto Rico, see: Panama vs. Puerto Rico, which is right for your business?

Sub F foreign base company service income is defined under Section 954(e) of the Internal Revenue Code as income derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services that are performed for, or on behalf of, a related person, and are performed outside the country under the laws of which the CFC is incorporated. Under this definition, income earned by a CFC will constitute foreign base company services income only if it satisfies all three of the following tests:

  1. The income is derived in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person or company; and
  3. The services are performed outside of the country in which the CFC is organized (IRC Section 954(e)(1) and Treasury Reg 1954-4(a)).

Thus, where a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income.”

Income that is deemed to be foreign base company services income is not eligible to be retained offshore tax deferred and not eligible to be tax free in Puerto Rico under Act 20. That is to say, Subpart F income must be included in the parent company’s US tax return and is taxable in the United States as earned.

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

There is no US tax benefit when Sub F income, including foreign base company services income, is generated in an offshore or Puerto Rican corporation. Thus, all service businesses must strive to eliminate Sub F income and must be prepared to deal with the issue in an audit.

The easiest way to avoid Sub F base company service income issues is to ensure that the services are performed where your offshore business is incorporated. This means that your business should be operated from a low cost and zero tax jurisdiction such as Panama or Puerto Rico.

Where US businesses often run into problems is in setting up a Cayman Islands corporation (in a high cost offshore jurisdiction where they won’t have any employees) and then hiring independent contractors in Latin America and India. You should be hiring employees and building a real division offshore… not just using a shell company to manage independent contractors.

I see the same issue when US companies set up divisions in low cost but high tax countries like Mexico. The Mexican corporate tax rate is 28.5% compared to the US rate of 35%, so not much savings there. Also, Mexico taxes the worldwide income of its corporations.

So, companies incorporate in Panama (which taxes local sourced income but not foreign sourced profits) and put the employees in Mexico, hoping to get the best of both worlds.

If your employees are providing a service from Mexico, and the business operates through a Panama corporation, you’re opening yourself up to Sup F foreign base company service income issues.

The other way to avoid Sub F foreign base company service income issues is for the offshore corporation to contract directly with the customer. The foreign company should contract with the customer and the customer should be paying the foreign company, not the US parent.

Basically, if the US parent is obligated to perform the services which are performed by the CFC, the income earned is attributable to the US company. This can be avoided by having the customer contract directly with the client such that the parent is not responsible for the service.

Also, the “related party” rules can apply if the foreign division receives “substantial assistance” from the US parent. To avoid this part of the test, the foreign division should be operating independently such that the work, as well as the mind and management of the business, is performed in the offshore jurisdiction (the country of incorporation). IRC Section 954(e)(1) and Treasury Reg 1.954-4(a). See also IRC Notice 2007-13.

When it comes to avoiding Subpart F of the US tax code, the US territory of Puerto Rico can provide significantly more cover to a CFC than any offshore jurisdiction. A corporation in Puerto Rico is a US entity for contract purposes and can open a bank account anywhere in the United States.

That is to say, a corporation from Puerto Rico can open a bank account at Wells Fargo in California, Bank of America in New York, or wherever it’s owners have a relationship. While an offshore company can only bank outside of the United States, a Puerto Rican company can bank where it likes.

These facts make doing business through a Puerto Rican company much easier than a foreign entity. This is especially true in high volume low dollar transactions. No one is going to send an international wire for a $200 product.

I hope you’ve found this article on how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation helpful. For more information, or for assistance in planning or forming a division in Puerto Rico or offshore, please contact me at info@premieroffshore.com

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?

Offshore IRS Audit

Prepare for an Offshore IRS Audit

There’s no worse feeling in the world than coming home to a letter from the IRS telling you that you are being audited … until you get notice of an offshore IRS audit. No matter how organized you are, you should fear the great IRS. If you have unreported accounts or become the subject of an offshore IRS audit, you need to take steps to protect yourself.

In this article, I’ll explain what you can do to prepare for an offshore IRS audit. If the collector is closing in, you have options. If the government isn’t at your door today, use these tips to structure your offshore affairs before trouble finds you.

First, you need to figure out how scared you should be. If you have an unreported offshore account or offshore company, you should be very afraid … a 10 out of 10. If you had more than $10,000 in an offshore account, even for one day, you face serious risk if you didn’t file an FBAR.

If you used an offshore incorporator to form your offshore company that doesn’t provide U.S. tax compliance, you should be concerned … anywhere from a 5 to 8 out of 10. This is because you might have failed to file a form or two. Even if you submitted the Foreign Bank Account Report (FBAR) and paid tax, you could be facing hundreds of thousands of dollars in penalties for not reporting the structure.

Second, you need to determine your risks. Are there any unfiled returns or forms? Any unreported income the auditor might find? Have you underrated your income or overstated your expenses? Are your records well organized and ready for an offshore IRS audit? If they are all stuffed in to the shoebox under your bed, the answer is no!

Finally, I strongly recommend you get help when facing offshore IRS audit. Only an experienced professional is capable of identifying these risks and determining how likely they are to come to light in the exam.

While I certainly appreciate your perusing this site, and my many articles on offshore filing, I am writing on their general use. When facing someone from the government whose only mission in life is to take what you have, you should hire a professional, even a tax attorney, to represent you. He or she will analyze your specific situation, identify weaknesses, and develop a comprehensive plan to deal with the offshore IRS audit.

Even if you think your risks are minimal, or you don’t have the money to hire a tax lawyer, at least consult a professional. Let them review the audit request, and consider your situation. Find out if they believe you can handle the agent on your own. This might cost a few hundred dollars, but will give you peace of mind. Be honest and tell them all the good or bad during the consultation.

Prepare for an Offshore IRS Audit

Whether you’re going in to battle alone, or with a tax lawyer by your side, here are my recommendations on how to prepare for an IRS audit that includes offshore transactions or international investments.

Don’t be a snitch! Never volunteer information in an IRS audit and this goes double in an offshore IRS audit. The agent is NOT your friend. He’s there to find errors and extract a penalty for those mistakes. While you must always be honest, only answer questions that are asked. Never volunteer new information or expand on a subject beyond the question. You might think you are helping, but you’re just making things worse.

The same goes for documents. Never give more paper than is requested. You might think it shows good faith, and you’d be wrong again. More documentation just gives them more ammunition. More chances to find an error or a discrepancy.

If you take my message to heart and hire a tax professional to do battle with the IRS, you might never speak to the agent. When I was representing clients in offshore IRS audits, I never let the agent get near them. All communications went through me and me alone. I minimized the information exchanged and did my best to keep the auditor focused on areas that were our strengths … and away from those that were of concern.

Review your bank statements. Go through your bank statements and understand each and every deposit. Those that are income should be identified as such. Those that are nontaxable, such as loans and gifts, should have supporting documents. The first line of attack in an offshore IRS audit is the bank statement, so be ready to prove up all nontaxable items.

At the same time, identify and find documentation for all business expenses. If you deducted it, have an invoice or receipt ready to go. Never be caught off guard when the agent asks, “What’s this payment for?” Have an answer with proof ready.

Remember that, so long as you are a U.S. citizen, the IRS has a right to audit your offshore company and international business activities. Therefore, you must maintain records of income and expenses for offshore transactions just as you would for a U.S. based business.

I understand that sometimes practices in foreign countries conflict with your desire to document expenses. For example, it is common to pay employees in cash in South America, but it’s hard to prove this as an expense to the IRS.

What I’ve found successful in offshore IRS audits is a log book. Keep a book of each cash payment including the date, employee (independent contractor), brief job description, amount, and their signature. So long as you keep a signed log, cash payments will usually be accepted by the IRS.

Don’t file a tax return during an offshore IRS audit. If you file new or delinquent returns during an exam, the audit will usually expand to add those years. If you file a return claiming foreign sourced income during an audit, you might be admitting to a crime … something you should never do. If your audit is going on around April 15, get an extension for last year’s return until October 15.

If you have unfiled returns, the agent will probably ask you to file them with him. Assume they’ll be audited and be prepared to prove each item. If you have unfiled returns and offshore issues, see Rule 1: Hire a Professional Immediately.

Foreign Earned Income Exclusion (FEIE): If you are living and working abroad, and qualify for the FEIE, you can earn nearly $100,000 per year tax free in a salary. However, if you don’t file a return, and get mixed up in to an offshore IRS audit, you can lose the FEIE entirely. That’s right, if you don’t take the FEIE you can lose it if you’re audited. If the IRS hasn’t contacted you yet, remember, use it or lose it and file as soon as possible.

Get your records in order. Begin to get your documents and supporting proof together the day you receive the IRS letter. Don’t delay and don’t put it off. I can’t tell you how many people hide their heads in the sand for weeks after receiving an offshore IRS audit notice. Don’t waste a minute. Get ready to meet the enemy in combat as soon as possible. The day of reckoning is coming and you are well behind in the count. You need every second to get ready.

It will take longer to organize your paperwork than you expect. Also, being proactive will give you time to develop a plan of defense and order any missing documents from banks, brokerages, etc. Remember that you never want to answer a question with “I don’t know.” You need to be ready and organized on day 1 to show you’re not the easy target the auditor is looking for … not a pushover who’ll go quietly, but rather someone who’s prepared and knows his rights.

* Note that all records must be printed. The IRS auditor won’t accept electronic files.

Try to be nice. Even if you have to fake it, be nice and courteous. Most IRS auditors are just doing their jobs … which, unfortunately, is to separate you from your money. They view you as one of their 100+ cases. Don’t be rude or do anything to get on their bad side. Remain one of 100. There is no reason to draw their ire or special attention.

If you are unable to deal professionally with an offshore IRS audit, don’t get involved and see rule 1 again. Hire a professional and stay out of the room. One of a tax lawyer’s more important skills is to treat the auditor with respect and direct them away from areas of concern.

Have a payment plan in mind. If you think the auditor will find your undocumented expenses or unreported income, have a plan to deal with the resulting tax bill. If offshore IRS audit will result in a balance due, you need to be ready to pay up. If you can’t pay now, have installment agreement ready.

For more information on setting up a payment plan, I suggest you read through www.taxdebtrelief247.com. This blog has quite a bit of quality information on how to deal with the collection division of the IRS.

I also recommend How to Settle with the IRS by Goldstein and Ofstein, and Stand Up to the IRS by Frederick Daily. Both of these books are available on Amazon.

You can find my book on international tax and business for American expats on this site (see the bookstore). It includes detailed information on battling the IRS in an offshore audit and settling with collections.

I hope you have found this post on offshore IRS audits helpful. Feel free to email me at info@premieroffshore.com with any questions or suggestions. If you require a tax attorney experienced in these matters, I will be happy to provide you with a referral.

IRS Criminal Investigation

IRS Criminal Investigations on the Rise

If you thought an IRS audit was bad news, just wait until the IRS agents with guns come and take you down.  The IRS Criminal Investigation Division, or CID, can seize your records, tap your phone, spy on your emails, and treat you like a major criminal – all for failing to pay up.  The IRS CID has the ability to take everything from you… including your freedom.

Once indicted, you have a 98.5% probability of going to jail.  The average sentence is 27 months.  And these weapons of mass destruction are being turned on all high net worth Americans, not just those with offshore accounts.

Under President Obama, the wealthy are more likely to come under criminal investigation.  The IRS Criminal Investigation Division (CID) has increased referrals for prosecution by nearly 40% under this President and I expect this number will double (to an 80 – 100% increase) before his term is over.

Just as the IRS targeted conservative fund raising organizations, they are now being accused of hitting wealthy Americans that “fit the mold” of Republican donors.  Many, such as Grover Norquest of Americans for Tax Reform, claim that some of these attacks are political assassinations meant to cut off money flow to rivals.  That the IRS is targeting Republican donors for criminal prosecution.  Others have suggested that its wealthy conservatives who are the big fish each IRS CID agent wants to mount on his wall.  That it’s open season on the wealthy in America.

Here are the stats:  The IRS CID recommended criminal prosecution in 4,201 cases last year, an increase of 38% from 2012.  The Department of Justice indicted 2,010 of these referrals.  Expect these numbers to increase during the remainder of Obama’s term as the IRS CID and DOJ are hiring as quickly as possible.

Let me give you a little background.  Just 10 years ago, no one other than drug dealers and money launderers were charged with offshore tax crimes.  These laws, and their draconian penalties, were intended to target dangerous individuals who couldn’t be taken down otherwise.  Think Al Capone and that ilk.

Tax preparers and lawyers had never heard of what is now the IRS’s primary weapon: the Foreign Bank Account Report (FBAR), though it had been a law on the books for decades.  There was no effort to criminalize most forms of tax planning and offshore tax matters were civil cases, just like traditional IRS audits.

That is, until the IRS learned how profitable putting Americans in jail could be!

From 2006 though 2008, the IRS Criminal Investigation Division waged an all out war on offshore accounts.  The Swiss bank UBS eventually fell and released the names of 3,000 of its clients, who immediately became targets of the CID.  So far, the IRS prosecuted about 550 of these individuals.  They selected one or two from each state to maximize the news cycle impact…to make sure their press releases got on every news cast and in every paper in the country.

* Eighty percent of the press releases just happen to come out in the weeks before April 15. Are they criminals or pawns in the Government’s marketing campaign?

This strategy worked great for the IRS…maybe not as well for the pawns.  It brought in about $10 billion in new revenue from taxes, interest and penalties.  Thousands of high net worth individuals, as well as average citizens living abroad and those with extended families in foreign countries, all lined up to pay to avoid jail.

Very little of these payments came from actual targets of the IRS CID.  Those with offshore account went broke defending themselves and while in jail.  Most of the revenues came from expats and others with accounts that the IRS did not know of..which was the purpose of the campaign.

NOTE: If you have an offshore account and don’t want to become one of the pawns, please take a read through my post on the IRS’s Voluntary Disclosure Program.

After maximize returns on their attack on the Swiss banks, , the IRS Criminal Investigation Division and other government agencies turned their sights of fining just about any international bank they could find. They quickly learned that they could fine banks just about any amount of money and get paid.  This brought in a few more billion and the free for all was on.  See my post on the $9 billion extorted from the French bank BNP Paribas.

IRS criminal investigations have been so profitable that the government is doubling down and hiring new gunslingers as fast as they can sign them up.  This also means that they will need to expand their number of targets and their case selection criteria.

As a result, the IRS is now targeting all wealthy Americans, not just those with offshore accounts.  Just because you have no international exposure, don’t think you’re safe from the new and more aggressive IRS CID.  Many tax matters that were once civil cases are turning criminal.  The IRS has found its targets are much more pliable, and willing to pay big fines, when they are at risk of going to jail for a few years.

It is possible that these cases are targeting high net worth Republican donors.  At least, that’s how it appears to lawyers and targets in the fight.  And, considering the IRS’s track record on targeting political rivals (Republican foundations and Gov. Perry to name two), it doesn’t seem to far fetched that they would use the criminal system to cut the purse strings of Republicans.

* The IRS Director Doug Sholman paid nearly 150 visits to the Obama White House from 2010 to 2012, far more than any other IRS director.

To put your mind at ease, or to increase the pressure, depending on where you land on the financial spectrum, here is a summary of your IRS audit risks.

For most working families, the probability of going before the great collector is slim.  If you earn $50,000 to $100,000 per year, you have only a .06% chance of being audited.

For those with incomes of $100,000 to $1 million, it varies from 1% to about 5%.  If you are self-employed and filing a Schedule C, you are at the higher end.  A W-2 with no charitable contributions or capital gains and you are near the bottom.

Now for the bad news.  If you earn over $1 million, your audit risk jumps to 12%.  If you reach the top of the heap and have an income of over $10 million, you have a 25% chance of facing down a very aggressive IRS agent.

Note that a 25% chance of being audited means you will likely be under the microscope three out of every four years.  An IRS exam typically covers three tax years.  So, you have a one in four chance of being audited and, once selected, they will analyze three years of returns.

It’s these higher net worth individuals who have the highest likelihood of criminal persecution.  Of those earning less than $250,000, the risk of a criminal charge is minimal.  Eighty-five percent of the cases brought are filed against those earning $1 million or more.  Though, the UBS cases were an exception because the government needed targets in each state.

Once you’re targeted by the IRS Criminal Investigation Division, you have a nearly 50% chance of going to jail.  The DOJ prosecutes about 50% of the cases referred by IRS CID (at least until they hire more staff) and 95% of these settle.  Also, the average time to complete a tax fraud case is 2 years and the average jail sentence is 27 months.  That’s followed by 3 to 5 years of probation.

While the case is going on, you must report all of your comings and goings to Pretrial Services and submit financial statements each month.  Most find it near impossible to work while on Pretrial release…especially those with small businesses or the self-employed.

As a result of their finances and businesses being destroyed in this process, many families don’t survive.  About 1/3rd are divorced by the time the target gets out of jail.

The U.S. government is going all in on criminal prosecutions by the IRS CID.  It is by far the best returning division of the IRS and you can expect it to continue bringing in the cash in the years to come.

Will Anyone Stand Up?

The government fired the first shots in the war on financial privacy with the Patriot Act in 2001.  As we all cowered under our desks in fear of another terrorist attack, our freedoms went out the back door…and no one said a word.

The U.S. extorted billions from Swiss banks and ruined the lives of 550 of its citizens, all in the name of increased revenue.  Americas were used as pawns in the tax game and no one stood up.

Then the U.S. turned offshore bankers in to unpaid IRS agents with FACTA.  As a result, Americans are persona non grata at most banks around the world.  Yet, no one said enough is enough.

Now that the IRS CID is targeting the wealthy, possible for political gain, will anyone step up and say enough is enough?

When the IRS knocks down your door with men in military style clothes and weaponry, will anyone resist?

When it’s you handcuffed on the floor with your wife crying and your kids screaming in the corner, being restrained by wanna-be commandos in flack jackets and guns drawn, will anyone come to your aid?

If you have unreported offshore accounts and would like to know your options, please email us at info@premieroffshore.com. We can review your situation and refer you to an experienced attorney if necessary.

If you are thinking of living, investing, or doing business offshore, and need an international tax and business consultant who will keep you in compliance with the US government, give is a call at (619) 483-1708.

IRS Levy

UK to follow IRS Levy Rules

The U.K. tax authority to allow IRS Levy type actions. If you owe the HMRC, they now have the authority to seize your bank account and raid your assets, just like an IRS levy.

Now, it’s no surprise that the U.K. is following in the footsteps of the mighty IRS levy. It’s just interesting that it took them this long to do so.

I also find it interesting how strong the reaction against what we Americans think of as “normal” has been in England. For example, the primary body of accountants said that the HMRC had a record of making mistakes and should not be allowed to levy without court approval.

In its statement, the HMRC said that these regulations bring it in line with other tax authorities which already have the power to take money debts directly from an individual’s account, just like France and the U.S. Of course, advocacy groups respond saying the U.S. should not be regarded as a role model of what is right and just … just the opposite in fact.

Once interesting caveat of these new “draconian” laws that match the IRS levy system, is that the UK will leave 5,000 pounds in the person’s account so they can afford to pay for basic necessities. If the account holds 15,000, and the debt is 20,000, the U.K. gets to take 10,000.

The IRS levy system has no such requirement. So long as the U.S. IRS can find your account, they can empty it up to the amount of the alleged debt, including interest and penalties.

According to the U.K. Low Incomes Tax Reform Group, these new laws will allow the tax authority to run roughshod over low income persons who prioritize necessary payments over taxes.

“To allow the HMRC to raid their bank accounts without safeguards or recourse to the courts would be to flout the rule of law in a manner unworthy of a public service body. It is not the same as seizing physical goods, it is depriving the debtor of the very means to live. Given the way the HMRC continually fails to deal with taxpayers properly or fairly is hugely worrying. To introduce such draconian measures without proper safeguards could well lead to an abuse of power.”

This is exactly what we Americans have been dealing with for decades … a government agency who offers horrendous customer service, fails to deal with individuals fairly, and can levy your personal and business bank accounts at will … often as the first line of attack and then they negotiate a payment plan. The IRS shoots first and asks questions later.

If the U.K. wants to see what happens when you give one government agency unlimited power to attack its citizenry, just look over the pond at the IRS levy system.

IRS Fees

IRS Fees

If you have a tax debt, there are a number of IRS fees for setting up a payment plan or installment agreement. These IRS fees can add up quickly if you default and need to reapply.

The IRS fee for setting up a payment plan on direct debit from your bank account is $52. This is the least expensive because you are authorizing the government to debt your bank account and the risk of default is lower.

The next IRS fee is $120 for an installment agreement if you will send in a check each month or have the money taken out of your paycheck (payroll deduction). With a payroll deduction, your employer must send the government a check on your behalf. As you can imagine, these are not very popular with taxpayers because of the embarrassment involved.

I will note that the IRS sometimes requires a payroll deduction rather than allowing you to send a check. If you have defaulted more than once, or without good cause, the government will want some assurances that it won’t happen again … which they believe they get with a payroll deduction.

If you have very limited resources, you might qualify for a $43 installment agreement, rather than $52 or $120. There are a number of low income categories, so, suffice it to say, you will need to be about at the poverty line to qualify for a low income installment agreement. To be honest, very view people who must make payments, and are not listed as uncollectible, qualify for the discounted rate. If your income is low enough for the discount, you probably don’t need to pay anything.

These IRS fees apply equally to payment plans setup online, through a professional, or by mail. If you owe less than $50,000, you can set up a streamlined payment plan online. If you owe $25,000 in payroll taxes, you may set up an online payment plan and these IRS fees apply.

I hope this post on IRS fees has been helpful. Please take a read through my more detailed articles on resolving your IRS tax debt.

Seize Your IRA

The IRS Can Seize Your IRA

I want to use today’s post to clear up a common misconception. Yes, the IRS can seize your IRA or other retirement account. Yes, the great collector is exempt from state laws protecting your retirement account and can take what it wants at any time … unless you take steps to protect yourself.

Specifically, the IRS may seize your Keogh, 401(k), IRA or SEP by sending a letter to your administrator demanding all the cash, up to the amount of taxes, interest and penalties they claim you owe. You have very little recourse to protect your retirement account once the IRS has issued this letter … known as an IRS levy of your IRA. Your administrator will be required to sell all assets under his control to pay the government.

If you wish to get some of the money back, you must prove that the taking of your IRA is going to create a significant and undue economic hardship on you and your family. As someone in the business for many years, I can tell you that this claim usually falls on deaf ears … unless you are going to be homeless and have near zero to pay for food and rent. If you are a person of means, the IRS may take your retirement account at will.

The same goes for ERISA plans, but the IRS may take only the amount that is vested. If you have a right to the money, then the IRS can get to it.

Now, here’s the kicker. When the IRS sizes your IRA, you must pay tax on that money as if it were distributed to you. If the IRS takes $75,000 from you on June of 2015, you must pay tax on that amount as an IRA distribution when you file your 2015 tax return. Obviously, this creates a new tax debt in 2015, but at least the IRS has theirs.

* You don’t need to pay an early withdrawal penalty on the amount the government takes.

You do have options. If you are concerned with the IRS and what might happen in the years to come, you can take control of your retirement account away from your administration. You can prevent the IRS from seizing your IRA by moving it to an offshore LLC and investing it out of the United States.

While it’s illegal to move assets offshore for the purpose of keeping them away from the IRS, you do have a right to seek higher returns and more diversification offshore. You may for an offshore IRA LLC, open bank and brokerage accounts, and invest in more secure assets – primarily foreign real estate and physical gold.

Though, I suggest it is best to take these steps before you owe the IRS. If they are actively coming after your assets, it may be a problem to take your IRA offshore … unless you have a good reason, such as you are going to move to that country. If you are going to retire to Panama, it makes sense to move your IRA to Panama.

Note that the IRS can also seize your account if your foreign bank has a branch in the United States. Putting your IRA in HSBC or Citibank makes little sense if you have a tax issue or are concerned with government interference. If you are going offshore, you should separate yourself from country risk by holding assets in local banks and consider diversifying out of the dollar.

I hope this is helpful. For more information on moving your retirement account offshore, please see my Self Directed IRA page. Feel free to phone or email to info@premieroffshore.com with any questions or suggestions. As always, consultations are confidential.

IRS Collection Statute

IRS Collection Statute for Expats

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

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

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

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

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

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

Application of the IRS Collection Statute

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

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

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

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

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

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

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

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

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

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

IRS Audit Statute

Offshore IRS Audit Statute

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Levy

How to Settle Your Expat Tax Debt

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

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

Expat Tax Option 1:  IRS Installment Agreement

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

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

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

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

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

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

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

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

Expat Tax Debt Option 2:  Offer in Compromise

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

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

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

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

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

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

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

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

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

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

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

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

Expat Tax Debt Option 3:  10 Year Collection Period

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

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

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

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

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

Expat Tax Debt Relief Option 4:  Innocent Spouse Relief

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

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

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

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

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

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

Expat Tax Debt Considerations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Retire Abroad

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.

Offshore Tax Fraud

Anatomy of Offshore Tax Fraud

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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