Cross-Border U.S. Tax Planning | IRS Foreign & Offshore Reporting
- 1 U.S. Persons with Worldwide Assets or Income
- 2 Non-U.S. Persons with US Assets or Income
- 3 Non-U.S. Persons (Pre-Immigration Planning)
- 4 Ownership in a Foreign Business
- 5 Estate Planning
- 6 U.S. Person Status – A Sword and a Shield
- 7 Golding & Golding IRS Offshore Voluntary Disclosure
Cross-Border and Tax Planning for U.S. tax related issues is a very complex area of law.
Cross-Border Tax related issues are becoming a mainstay for individuals worldwide who are required to file US taxes. Moreover, even in years in which they do not meet the threshold to actually file a return, if they are considered U.S. persons and/or have U.S. sourced income — there are still significant reporting and disclosure requirements.
When it comes to cross-border US tax planning issues, some of the main issues and distinctions involve the following:
- U.S. Persons with worldwide assets or Income
- Non-U.S. Persons with US assets or income
- Non-U.S. Persons becoming US persons/Pre-Immigration planning
- Foreign Business Interests
- Estate Planning
We will review each one of these items separately to provide a brief summary of how cross-border US tax planning and tax individuals worldwide.
U.S. Persons with Worldwide Assets or Income
This is probably the most common issue that we come across daily at Golding & Golding. The situation usually involves a US person who either didn’t know they had to report their foreign income, were unaware that they had to disclose foreign or offshore assets or investments that they had prior to becoming a US person, or have foreign accounts they did not know needed to be reported.
If a person is a US person, then they are subject to tax on their worldwide income. Moreover, if they are US person – and even if they do not meet the threshold requirement to have to file a tax return, they are still required to meet the reporting and disclosure requirements, in accordance with many different laws, including: FBAR, FATCA, PFIC, International Gift, International Inheritance.
If a person is considered a US person for tax purposes, then they must disclose their assets, investments, or accounts abroad. It does not matter if they had the accounts prior to becoming a US person, and it is immaterial that they may have already reported or disclosed the accounts, investments or income under foreign country laws.
The failure to report this information has significant fines and penalties.
Depending on how many years a person has been out of compliance, along with the purpose of the noncompliance, whether they were willful or non-willful, and/or whether they already pay tax in a foreign country — they may have different tax credits and amnesty opportunities available to them.
Non-U.S. Persons with US Assets or Income
When a non-US person has US assets, income, or investments the rules change. Why?, Because if a person is neither a U.S. Citizen, Legal Permanent Resident, nor Foreign National who meets the substantial presence test, then the IRS has no legal right to enforce US laws against them… Unless they had US property, income, assets or investments.
Whether or not a foreign person is subject to US tax law would depend on the type of investment and the specific treaty (if any) that exists between the two countries.
For example, certain interest income may be nontaxable by the US government (although the individual may be taxed in his or her own country under treaty laws). Moreover, the sale of certain assets by foreign person within the United States may not be taxed, unless it is real estate in which the rules change and more likely to be a taxable asset.
Moreover, when real estate and a foreign person is involved, there other withholding issues that the parties must comply with in accordance with FIRPTA.
Non-U.S. Persons (Pre-Immigration Planning)
This is a very common scenario we handle at Golding & Golding. A person is a foreign person, but is considering becoming a US person. Either the person married a US Spouse, and/or was presented with a job opportunity or investment opportunity within the United States that will bring them to the United States full-time.
The individual may have the foresight to have spoken with other individuals who also became US persons, and/or spoke with an experienced offshore reporting and disclosure attorney.
As a result, pre-immigration planning is a great way for the individual to prepare for what reporting he or she may be responsible for after they become a US person. By being actively aware and knowledgeable about what needs to be reported in terms of income, assets, investments, or accounts is key to IRS Compliance
In other words, with proper planning, the person may be able to avoid the same noncompliance and danger of IRS Penalties that millions of individuals find themselves in each year.
The IRS has made offshore enforcement a key priority. So much so, that the IRS has named offshore enforcement one of the top three dirty dozen tax “situations” to be cognizant of U.S. Person.
By properly planning, a person will be able to be prepared when it is time to move to the United States and/or become a US person. By gifting or transferring certain interests in property, or assets prior to becoming US person they may be able to avoid very harsh and strict reporting requirements for certain investments, business ownership, etc.
Ownership in a Foreign Business
In many different countries, business tax returns are not very difficult (In fact, individual tax returns are not very difficult either). For example, in Taiwan the tax return typically amounts to a few pages. In Russia, the country withholds taxes for the individual and then submits to them a form which is essentially their tax return.
The U.S is different (Read: Burdensome). The United States has massive reporting requirements for individuals who have ownership or interest in foreign businesses. It does not matter if it is a foreign partnership/joint venture, Corporation, or other mechanism used to hold foreign interests.
This is also very important in the specific situation of a Sociedad Anonima. We speak about this type of business structure often on our website, since it is very common in Latin American countries. What is also very important to note is that it is an IRC section 301 specific type of corporation – which cannot be disregarded.
More so, the Soceidad Anonima is oftentimes used as an estate planning tool or something similar to an LLC to hold foreign property as opposed to an active business. As a result, while the foreign country may not have much by way of reporting for this hybrid business/estate planning, United States considers it a corporation (foreign corporation), which means there are significant reporting requirements on IRS forms, including form 5471.
Complicating matters further, is that if the individual is the primary owner of the business and becomes a US person, and the business may become Controlled Foreign Corporation. As such, if it is a controlled foreign corporation and its earning passive income/Subpart F Income, there may be immediate tax liability if there is annual earnings and profits – it may also unwittingly become a PFIC.
Result: if you are a foreign person with a foreign business and are going to become a US person is crucial to plan for tax purposes.
This is one of the biggest pitfalls involving foreign persons and US property. Typically, a US person has a $5.49 million exemption (2017) for gifts and estates on their worldwide assets. The gift and estate exemption is in one basket. In other words, a person can either give away $5.49 million in their lifetime, and/or leave their estate worth that same value — or both (up to $5.49 million).
If a person has gifted nothing during life (without consideration for charitable trusts, medical payments, 529A or the annual exemption/exclusion), and they die with their estate was worth $5 million — there be no estate tax.
The rules are entirely different for foreign persons owning US situs — in fact, the rules cannot be anymore lopsided. Instead of a nearly $5.5 million exemption, the individual that is a foreign person enjoys an exemption of $60,000.
That’s right, $60,000. Therefore, if a foreign person wants to invest in the United States and owns a few million dollars in property, unless he or she properly plans then any amounts over $60,000, will be taxed at the state tax rate, which is 40%.
So in the same example as above, instead of having no tax liability, the person would have a more than $2 million tax liability.
U.S. Person Status – A Sword and a Shield
For example, if a person becomes a US person after they owned several accounts and investments abroad, they must report the accounts and investments once they become a US person — even if they own them prior to becoming a US person.
Likewise, if a person owned $5 million of US property as a foreign person, and then becomes a US person, when he or she dies, the value will be $5.45 million even for the property that was owned prior to the person becoming a US person.
Golding & Golding IRS Offshore Voluntary Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets).
If you are already out of compliance with U.S. and IRS Taxes, contact us to schedule a Reduced Fee Initial Consultation – We Can Help You!