Considering an “Offshore Asset Protection Plan?” Think Again — What They Don’t Tell You Can Hurt You

If you are an individual who keeps a close eye on your finances, it is almost inevitable that you willcome across an individual or group offering to eliminate taxes on all or some of your income through offshore accounts, trusts, holding companies, or other entities. In other cases, the individual or organization may tout an offshore trust’s ability to insulate assets from a domestic legal judgment, divorce, or other liability. These outfits always make grandiose promises about how offshore asset protection provides a “legal wall” to protect your assets while also allowing you to direct and control the day-to-day activities of your financial accounts. It almost sounds too good to be true.

Unfortunately, for individuals who engage in one of these asset protection schemes, the harsh reality is that few of the drawbacks, tax concerns, or other important caveats are disclosed in the sales pitch. The sales pitch – and perhaps the process — may neglect to mention important details that can involve significant amounts of compliance work to satisfy passive foreign investment company (PFIC) disclosures and tax rules.In more dire circumstances, recommendations toviolate U.S. law can open oneself up to criminal tax prosecution. In fact, concealing an offshore account to keep it secret is a violation of the law in itself.

Taxpayers Are Required to Pay Taxes on Foreign Income

A number of distinguished minds have provided wise guidance regarding the obligation to pay taxes. Learned Hand is probably most well-known for stating, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” However, taxpayers often twist these words to mean what they want them to mean. They seem to believe that they can make paper transactions and characterize accounts in ways that do not comport with reality. Generally, they ignore the equally important maxim expressed by federal judge Irving Loeb Goldberg in that, “A taxpayer may engineer his transactions to minimize taxes, but he cannot make a transaction appear to be what it is not.”

The same holds for foreign accounts, trusts, and other entities. If the taxpayer derives foreign income from any of these entities, he or she is generally obligated to pay tax. He or she may not make fraudulent conveyances or mischaracterize transactions to avoid tax. While there are certain exceptions where this obligation can be deferred, they are exceptions beyond the general rule and should not be relied upon absent the advice of an experienced international tax practitioner. The failure to pay taxes on foreign income can lead to penalties, interest, and criminal tax evasion charges.

Taxpayers Are Required to Disclose Foreign Accounts; Failure to Disclose Can be Criminal Tax Evasion

Another serious problem with keeping foreign accounts and trusts secret are the numerous disclosure requirements that a U.S. taxpayer faces. To start, taxpayers are required to disclose an array of foreign accounts under Report of Foreign Bank Accounts (FBAR) when the aggregate value of foreign accounts exceeds $10,000. This means that practically all individuals considering asset protect would potentially have offshore assets in excess of this threshold. Therefore, reporting the account on FinCEN Form 114 would be required by law.

However, FBAR is far from the only disclosure required by U.S. taxpayers. Depending on the assets held in foreign accounts or entities, a Foreign Account Tax Compliance Act (FATCA) disclosure may also be required. Failure to comply with FATCA can result in significant penalties including an initial penalty of $10,000 and continued penalties of up to $50,000 for continued non-compliance. Furthermore, Schedule B of one’s annual income tax return requires the disclosure of one’s interest or signature authority over foreign accounts and trusts. Since one’s income tax is submitted under the penalty of perjury, non-disclosure here can result in an array of potential penalties.

While it is true that taxpayers can often fix their non-disclosure through OVDP or Streamlined disclosure, it is better to avoid the problem in the first place. Furthermore, if willfulness is an issue and the individual must use standard OVDP due to the protection from criminal penalties it can provide, the individual will lose 27.5 to 50% of his or her “tainted offshore” assets. While this is a significant penalty, it is still far preferable to the criminal and civil consequences that can be imposed for willful violations of FBAR and the U.S. Tax Code.

Tax Concerns Due to an Offshore Asset Protection Plan?

If you fear that you’ve made foreign disclosure or tax mistakes due to an offshore asset protection plan, dually licensed tax attorney and CPA David Klasing can help. David and the legal team of the Tax Law Offices of David W. Klasing understand international tax obligations and can assist you in coming back into compliance with U.S. law and mitigating the consequences you could potentially face. To schedule a reduced-rate consultation at either the Irvine or Los Angeles locations of the Tax Law Offices of David W. Klasing call 800-681-1295 today or contact the firm online.