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On your lap sits a suitcase filled with cash (of legally withdrawn money) that you traveled with to UBS (because you’ve seen way too many spy movies).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.”
- 1 Is this Offshore Money Illegal?
- 2 Do I Pay U.S. Tax on the Income it Generates?
- 3 Can I Avoid U.S. Tax by Moving Money Offshore?
- 4 How Can I Limit My Offshore Reporting?
- 5 But You Hate Real Estate Rental Investments…
- 6 A Few Important Tips to Successful Offshore Investments
- 7 What if I am Out of IRS Compliance?
- 8 Golding & Golding: About Our International Tax Law Firm
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.
What if I am Out of IRS Compliance?
When you have not met your prior year IRS foreign bank account compliance obligations, your best options are either the traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.