Each year, with great fanfare, the IRS publishes a list of what it calls the “Dirty Dozen Tax Scams.” Last month, it published its most recent list, which you can read here.
Identity theft and phone scams in which a person contacting you impersonates an IRS agent and tries to steal your money top this year’s list. But amazingly, the IRS still has “hiding income offshore” as one of its Dirty Dozen. To which my reaction was, “Are you people out of your mind?”
According to the IRS,
Over the years, numerous individuals have been identified as evading US taxes by hiding income in offshore banks, brokerage accounts, or nominee entities and then using debit cards, credit cards, or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities, or insurance plans for the same purpose.
Now, I’ll concede that at one time there were a significant number of Americans who had offshore investments they didn’t report or pay taxes on. For the majority of clients whom I’ve dealt with who have this issue, though, the omission wasn’t deliberate. They simply didn’t know they were supposed to report anything.
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One client had operated a business in a high-tax jurisdiction for more than 20 years and had banked and paid taxes in that country but had acknowledged nothing to the IRS. I described the various reporting obligations that he had neglected over the years and asked him if he were aware of any of them.
“No,” he replied. “My accountant told me that since I was paying tax in another country, there was no further obligation to report or pay tax on the income in the US.”
We helped this client get enrolled in the IRS’s “Offshore Voluntary Compliance Program.” Because he was acting on the written advice of a tax professional, he probably won’t face any penalties. And because he already paid tax in one country, he probably won’t need to pay more to the US. But he still must file eight years of amended tax returns along with IRS and Treasury reporting forms detailing his non-US investments. Of course, he must pay US tax and file these forms going forward as long as he remains a US citizen.
This situation happens all the time. And the fact is, until relatively recently — four or five years ago — many accountants and even some CPAs misinformed their US clients about the tax and reporting obligations for offshore investments and international business ventures.
Here’s another typical story:
A client whom I’ll call Kevin stopped filing tax returns in 1980, when he left the US to move to a remote Asian country. Since then, he’s been back to the US for only a handful of visits. After he was settled, he asked his accountant if he needed to file tax returns since he no longer lived in the US. His accountant assured him he no longer had this responsibility. With our help, the client enrolled in the IRS’s “streamlined” filing compliance procedure. Due to the circumstances of his case, he will likely not face any penalties, but he still must pay back taxes for the previous three years and file IRS and Treasury reporting forms detailing his non-US investments for the last six years. And since Kevin remains a US citizen, these obligations will continue in the years ahead.
There are lots of people like Kevin in the world, and I can assure you, they’re not involved in any “offshore tax scams.” They’ve mostly been misinformed or simply didn’t realize they were supposed to file anything once they left the US. That’s mainly because until a few years ago the IRS made little effort to inform Americans living overseas of their offshore tax and reporting responsibilities.
That’s now changed, of course, and in a very big way. And the biggest change of all has come in the years since 2010, when Congress enacted the Foreign Account Tax Compliance Act (FATCA). In a nutshell, this law holds offshore banks and other “foreign financial institutions” (defined very broadly) responsible for making certain that their US clients obey the offshore tax and reporting rules. My most recent essay on FATCA is here.
In the wake of FATCA, and based on extensive personal experience, the vast majority of offshore banks, trust companies, etc., are scared to death of dealing with US clients. It’s safer to simply show US citizens and residents the door and not deal with them. And those few that do welcome US clients have integrated their systems with the IRS, as FATCA requires. Today, there’s virtually no way that a US person can invest internationally without the IRS learning about it.
And that brings me back to the Dirty Dozen nonsense. The IRS knows very well that FATCA and similar laws have led to the closing of hundreds of thousands of offshore accounts once held by Americans. It also is fully aware that there is no practical way today for a US person to use “offshore banks, brokerage accounts, or nominee entities” to evade taxes, as it claims in its Dirty Dozen announcement.
Even international transactions outside the banking system, such as foreign real estate, are caught in the IRS net. If you ever want to cash out, you will need to run the funds through a bank or escrow account… somewhere.
In short, the Dirty Dozen list — or at least the “offshore” part of it — is pure propaganda, designed to whip up outrage from Congress and the sheeple against those “unpatriotic” Americans who live, invest, or do business internationally.
Don’t believe this drivel. The fact is it’s never been more important for Americans — and indeed, residents of any country — to invest beyond their own borders. True, if you’re a US citizen or permanent resident, you can no longer keep your financial dealings a secret from the IRS (with a few important exceptions, such as precious metals you hold in a safe deposit box). But all the other advantages of international investments remain intact:
- Access to investment and business opportunities not available in the US. Sure, you can buy the largest and most liquid non-US stocks and bonds in a domestic account, but if you’re serious about investing outside the US, you need to use a non-US bank or broker to do it.
- Enhanced asset protection. The US is by far the world’s lawsuit leader, and domestic strategies and structures to protect yourself against frivolous lawsuits aren’t always effective. Creating the right offshore “structure” is a great way to gain protection from the US legal system. It can even protect you against the notoriouscivil forfeiture racket.
- Greater privacy. Go to your Internet browser, bring up Google or another search engine, and type in the phrase “find hidden assets.” When I performed that search, Google returned 26,800,000 results. Virtually every one of the results on first few pages referred to finding assets in the US. And, fact is, in the US, almost every piece of personal information that you might want to keep private is for sale. In contrast, most countries — even those without “bank secrecy laws” — prohibit banks or securities brokers from releasing customer data except under very strict rules.
- Reduced portfolio risk. It’s been proven time and again over the last few decades that globally diversified investment portfolios carry significantly less long-term risk than those concentrated in only one market. When you invest in different international markets, you diversify across different markets, currencies, and legal systems.
I’m mad as hell at the IRS for consistently lying to Americans about the “threat” that offshore investments supposedly pose to the US tax system. That supposed threat doesn’t exist… and the reasons for Americans to invest beyond their own borders are more compelling than ever.
Are Your Offshore Investments a Tax Scam?
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