Key Strategic Tax Consulting for Offshore Assets and Income

Key Strategic Tax Consulting for Offshore Assets and Income

Key Strategic Tax Issues for Offshore Asset Consulting

With the globalization of the U.S. economy, it is very common for U.S. Citizens and other Americans to have many different offshore assets and investments across the globe.  

Some common types of offshore accounts and assets include:

• • • Investment Accounts

    • High-Yield Interest Accounts

    • Mutual Funds and ETFs

    • Pension Accounts

    • Life Insurance

    • Trusts

    • Entities

Some taxpayers may have very basic types of investments such as high-yield foreign bank accounts. Other taxpayers may have investment properties or investment accounts such as foreign mutual funds and ETFs. It is also very common for taxpayers who may have previously lived in foreign countries to have one or more rental properties to generate monthly income. Depending on the scope and value of the foreign investments will help dictate how these assets should be protected. Noting, that the U.S. government has very strict requirements for taxpayers who maintain offshore assets and accounts. There are many different types of international information reporting forms that taxpayers may have to file depending on the size and extent of their foreign investments.

Some of the more common forms include:

• • • FBAR (FinCEN Form 114)

    • FATCA (Form 8938)

    • PFIC (Form 8621)

    • Foreign Trust (Form 3520-A)

    • Foreign Gifts, Inheritances and Trusts (Form 3520)

    • Foreign Corporation (Form 5471)

    • Foreign Partnership (Form 8865)

Let’s walk through some of the basics that taxpayers should be aware of when maintaining offshore assets, accounts, and investments.

First, Who is an Offshore Tax Lawyer Specialist?

Just because a tax attorney claims to be an expert or a specialist, does not make it so. For example, some attorneys claim to be Board-Certified Tax Law Specialists, but this is a false misrepresentation (and can be very dangerous to Taxpayers trying to stay in IRS compliance for their offshore assets and income). To be considered a Board-Certified Tax Law Specialist, the taxpayer must be licensed by at least one state bar association as a specialist (even if all they handle is international federal tax). Beware of attorneys claiming to be board-certified when they are not. Oftentimes, these attorneys will offer ‘free initial consultations‘ that are merely designed to scare the taxpayer into retaining the attorney before the taxpayers have an opportunity to speak with a real specialist.

This resource can help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Are you a Citizen, Permanent Resident, or SPT?

One important aspect of offshore tax strategy consulting is for the taxpayer to determine what their U.S. person status is since this will impact the extent of the reporting that is necessary — as well as the different options. For example, if a taxpayer is a U.S. citizen, then they are typically taxed on their worldwide income and all of their foreign assets and accounts have to be reported — U.S. Citizens do not have much opportunity to take advantage of any treaty elections. If instead, the person is a lawful permanent resident, then they may be able to make certain treaty elections to be treated as a foreign person, which will significantly reduce the amount of tax planning they require. Likewise, if the taxpayer is only considered a U.S. person because they met the substantial presence test then they have to evaluate if they intend on continuing to reside in the U.S., because if they do not meet the substantial presence test then they are no longer required to report their worldwide income.

Should You Use Domestic or Offshore Asset Protection?

Oftentimes, taxpayers will utilize both domestic and offshore tax planning for their foreign assets, but many times this is because the tax attorney has not properly explained the pros and cons of this approach. For example, it is possible to put foreign assets into a domestic trust, but now a portion of the domestic trust will be considered foreign, which means issues involving the throwback rule, Form 3520/3520-A, and other international reporting and tax implications will impact the tax planning and what the taxpayer may have on an annual reporting basis. 

Are You Living in the U.S. or Abroad? 

When taxpayers live abroad, or even if they live domestically but have various foreign tax credits, sometimes they may not have much of a net effective tax liability even though they have several foreign assets generating foreign income. Therefore, taxpayers should consider whether they are living in the United States or abroad when they determine what type and to what extent they require offshore asset planning.

Do All Your Offshore Assets Need Protection?

Generally, the answer is no. But while the foreign assets may not need ‘protection,’ it may require tax planning. For example, if a taxpayer is a foreign person who has ownership of a foreign trust or ownership of a foreign company, then they may require some substantial offshore tax planning to try to minimize any tax issues. That is because if a foreign person becomes a U.S. person while owning certain foreign entities, then they may have to start filing Form 5471. Likewise, if the taxpayer is the owner of a foreign trust and then becomes a U.S. person, they may have to file both Forms 3520 and 3520-A (All the forms identified in this paragraph are very complex and taxpayers would benefit greatly by not having to file these forms).

What About Offshore Retirement and Pension?

Especially when taxpayers reach an older age — retirement and pension are typically two main sources of income. It is important to note that the U.S. government treats pension and retirement differently, depending on whether there is a treaty with the foreign country and whether the pension is employment-borne or a personal pension. For example, when the taxpayer earns a pension in a treaty country through employment then typically they will not be taxed on the growth until that income is distributed. Conversely, if the taxpayer has a pension in a non-treaty country, then generally the growth is taxable because there is no treaty or otherwise limiting the taxation of the income being generated in the foreign country. Likewise, personal pensions are typically subject to more immediate tax implications than employment pensions.

What is FBAR Compliance, Why is it Important?

When it comes to international information reporting, the most common form taxpayers will learn about is the FBAR. The reason why the FBAR is so important is because the failure to file this form or filing it significantly inaccurately may result in FBAR fines and penalties. Depending on whether the U.S. government believes the taxpayer was willful or non-willful can impact the extent of penalties, noting that willful penalties can lead to fines upwards of 50% in value of the maximum account balance in each year up to 100% maximum. Non-willful penalties have been limited under the recent Supreme Court case in Bittner, but the IRS has become much stricter when it comes to trying to negotiate or mitigate penalties. Therefore, it is important that the taxpayers who have offshore assets try to remain in compliance and if they are not in compliance now to get into compliance sooner than later.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.