201812.09
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Is it Illegal to Purchase Offshore Assets or Move Money Overseas?

Is it Illegal to Purchase Offshore Assets or Move Money Overseas? (Golding & Golding)

Is it Illegal to Purchase Offshore Assets or Move Money Overseas? (Golding & Golding)

Is it Illegal to Purchase Offshore Assets or Move Money Overseas?

The word “offshore” usually conjures up an image of yourself sitting across from a well-dressed banker in Switzerland.

On your lap sits a suitcase filled with cash (of legally withdrawn money) that you traveled with to UBS (because you’ve seen way too many spy movies).

As you sit across from the banker, a hostess pours you a glass of champagne as the banker sells you on the benefits of moving your money offshore.

You flip open your suitcase with crisp $100 bills, shake hands, and are escorted into a limousine where you toast your soon-to-be excessive riches and glamorous life….

…In reality, it was probably your Grandma Jean who lived in Panama and opened a few accounts for you and the rest of your siblings when you were all barely old enough to walk, because her friend at work said it was a smart idea.

She re-married a wealthy retiree, who thought you and your siblings were so sweet to Grandma Jean, and he left you some of his wealth too.

In either scenario, you now have $1,000,000 in “offshore money.”

Is this Offshore Money Illegal?

“Offshore” money, by default is not “illegal.” The money is not illegal just because it sits offshore. In other words, if the money is legal, then the mere fact that it is housed overseas does not make it illegal.

Do I Pay U.S. Tax on the Income it Generates?

Generally, yes. The U.S. follows a worldwide income taxation model. This means if you are a U.S. person and you file taxes in the U.S., you report all the income on your U.S. tax returns – whether or not you withdraw the money, see the money, touch the money, hear the money, etc.

Unless the money is exempt or excluded via treaty or other agreement with the foreign country, it is usually taxable.

Can I Avoid U.S. Tax by Moving Money Offshore?

Usually, you cannot avoid U.S. tax just by moving offshore. But, if you are able to develop a strategy to earn significantly more money in overseas investments vs. U.S. investments, that is legal (and smart).

You may also be able to limit your offshore reporting.

How Can I Limit My Offshore Reporting?

Here’s an example: You have $1.0 Million sitting in 4 accounts. It earns significant income, but you despise having to continue reporting your account info to the U.S. government on your tax returns. Since they are investment accounts, they generally belong on an FBAR and FATCA form 8938. 

Instead, if you withdraw the money, close the accounts, purchase some rental properties under your name (not in an entity), hire a management company so you don’t have to deal with the headache (and don’t have open your own foreign account), then the year after the accounts closed, they no longer have to continue to be reported.

AND, since the rental properties are now under your own personal name, they no longer have to be reported on the FBAR or FATCA.

AND, since you no longer have foreign accounts (the management company transfers the income directly to your U.S. accounts), you have no FBAR or FATCA account reporting.

AND, since you can take depreciation, you may be able to significantly offset the income using a 40-year S/L depreciation.

All that and you did it legally (Grandma Jean would be proud of you — she always liked you best anyway).

But You Hate Real Estate Rental Investments…

We get it, real estate can be a bit of headache. So, you decide to stick with the foreign investment firm.

The main takeaway is that if you have money offshore that is generating solid income, there is nothing illegal about keeping it offshore. If you are going to keep your money in foreign investments, it is important that you properly report and pay U. S. tax on the money.

A Few Important Tips to Successful Offshore Investments

PFIC (Passive Foreign Investment Company)

A PFIC is a Passive Foreign Investment Company.  It is a company that generally operates overseas (offshore, foreign country, abroad) and generates a majority of its income through passive means, and/or has a majority of its assets as passive assets. In other words, the monies being generated are through passive means as opposed to active means.

For example, if David has a company in Hong Kong which he uses to consult, and all of the money earned is through his active consulting with other businesses, then that is an active type of company and would not be subject (other factors pending) to treatment as a PFIC — since David generates his income through active means.

Alternatively, if David operates a holding company overseas (including Foreign Mutual Funds or possibly Foreign Insurance Companies) in which all the money earned is through the payment of dividends, interest or capital gains to the Holding Company that “holds” the investments, that would most likely be a passive company.

Why? Because the money being earned is not as a result of David working, but rather as a result of the investments earning money (not to be confused with David operating as a trader or investment analyst and charging for his investment knowledge and services).

*Annual PFIC tax and reporting can be very complex, and typically you will require the help of a Tax Attorney or CPA to complete PFIC Form 8621.

CFC (Controlled and Non-Controlled Foreign Corporations & Partnerships)

A Controlled Foreign Corporation (CFC) is a Foreign Corporation that is owned primarily by U.S. Persons. Specifically, the Corporation is owned more than 50% by U.S. Persons and each shareholder owns at least a 10% share of the CFC.  

The owners of Controlled Foreign Corporations (or at least one owner) will generally have to file an IRS Form 5471 “Information Return of U.S. Persons With Respect To Certain Foreign Corporations” so that the IRS can keep track of the U.S Persons’ interests in the Foreign Corporation.

*Annual CFC (and non-CFC Foreign Corporate ownership) tax and reporting can be very complex, and typically you will require the help of a Tax Attorney or CPA to complete Form 5471 or 8865 for Partnerships

FBAR (Report of Foreign Bank and Financial Account Form)

An FBAR statement is a Report of Foreign Bank and Financial Accounts form. It is electronically filed annually with the Department of the Treasury online. 

An FBAR is required to be filed when a person or business (explained below) has an annual aggregate total of foreign accounts that exceeds $10,000 on any day throughout the year. It does not matter if all that money is in one account or if a person had 11 accounts with $1000.00 in each account.  Once your overseas foreign accounts exceed $10,000, it is now time to report all of the foreign accounts. 

You are required to report the maximum balance throughout the year. If you do not have the maximum balance available, you can mark the box that notes the Max balance is unavailable — or alternatively you can use the best value you have, and then note that information on the FBAR.

FATCA (Foreign Account Tax Compliance Act)

FATCA is the Foreign Account Tax Compliance Act, and it requires both individuals and foreign financial institutions worldwide to report foreign account and “Specified Asset” information to the United States.

With the FBAR, the $10,000 threshold requirement does not vary. In other words, whether or not you are single, married filing jointly, or reside outside of the United States — the $10,000 threshold is still the same.

The FATCA Form 8938 is different. Not only must you have an interest in the account, but the threshold requirements vary — depending on whether you reside in the United States or in a foreign country, and whether you are married or single.

For example, if you are single or married filing separate and reside in the United States, then the minimum threshold requirement is $50,000 on the last day of the year or $75,000 on any day of the year (if you have less than $50,000 on the last day of the year). In sharp contrast a person filing married filing jointly and residing overseas may have a minimum threshold requirement of $400,000.

If You are Out of Compliance, What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

We Specialize in IRS Voluntary/Offshore Disclosure

At Golding & Golding, we specialize in Offshore, Foreign and International tax related issues.

Tax matters involving tax fraud, offshore accounts/assets, and forced disclosure. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

You May Avoid Tax Fraud with IRS Voluntary Disclosure

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.