The Foreign Account Tax Compliance Act of 2009 (Rangel-Baucus Bill)

The Foreign Account Tax Compliance Act of 2009 (Rangel-Baucus Bill)



Recent Offshore Tax Haven Legislation

Since 2007, numerous attempts have been made at passing targeted tax haven legislation. Although none of these initiatives has progressed in any meaningful way thus far, under the Obama Administration there is a much higher likelihood that this type of legislation will be promoted.

SEE THE WHOLE STORY HERE

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YEAR END TAX SCAMS GETTING A BIG PUSH - AND PUSH BACK - FROM UNCLE SAM

At the end of every year clients of all types (especially MD's) and advisors rush to find last minute ways to minimize the tax liability for the year. We see many plans of questionable value and legality pushed through in the last couple of weeks when due diligence is slowed by Holiday schedules and your trusted advisors' massive workloads. Here are some potential landmines to look out for. If you are being pressured into funding a plan over the holidays, make sure you know exactly what you are stepping into and have experienced counsel.

Where did this list come from? THE I.R.S.

In contrast to their many legitimate roles, foreign entities are increasingly being promoted as a means to divert income and conceal assets for taxpayers who have no real operations in a foreign country.

In addition to preferential tax regimes and protection against creditors (which is how and why I use them to protecet people every day - with full tax reporting), most tax havens also offer strict laws against disclosure of banking and business records. Generally, these nations do not have income tax treaties with the United States, and tax evasion is not considered a criminal act subject to Mutual Legal Assistance Treaties. Promoters of many abusive offshore schemes rely on the difficulty of access to records of tax haven banks, attorneys, and trustees. Furthermore, in the absence of government scrutiny, some offshore banks, attorneys, trustees, and other service providers have been known to falsify or fabricate records.

Despite being hidden or disguised, the income and assets of U.S. persons are still subject to U.S. tax. Taxpayers should be aware that abusive offshore arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of arrangements. Furthermore, taxpayers and/or the promoters of these offshore arrangements may be subject to civil and/or criminal penalties.

Following are summaries of some identified schemes that make the IRS mad:

(Offshore) Limited Liability Companies (LLCs) - In response to efforts by the Organization for Economic Cooperation and Development (OECD) to eliminate harmful tax competition, some nations labeled as tax havens have accused OECD members of carrying on the very practices the members seek to stop. One example put forth is the ease with which nonresident aliens may do business through limited liability companies (LLCs) domiciled in the United States, in comparative anonymity. An October 2000 report by the General Accounting Office gives insight into the use of corporations as conduits for illicit funds. Abuse of anonymous corporations in the U.S. by foreigners mirrors the abuse of tax haven entities by U.S. persons.

Offshore Deferred Compensation Arrangements - Many highly compensated professional persons and business owners in the U.S. have been solicited to participate in "offshore deferred compensation plans". The U.S. taxpayer is encouraged to sever an existing employment relationship and substitute an arrangement in which the nominal employer is a foreign "employee leasing" company. The supposed result of this abusive arrangement is that the taxation of a large portion of the professional's or business owner's salary is deferred while he/she gains immediate access to the funds through loans or offshore-based credit cards. An improper deduction for employee leasing expenses is also created on the corporate tax return.

Fictitious or Overstated Invoicing - Some U.S. taxpayers have entered into schemes in which the taxpayer's U.S. business is billed by a purportedly unrelated offshore entity for goods or services (e.g., "consulting services") that are either nonexistent or overvalued.

Factoring of Accounts Receivable - A U.S. taxpayer's business may discount or "factor" its receivables to a purportedly unrelated foreign business entity. The discount or factoring fee significantly reduces U.S. tax liability, and is moved to an offshore entity where it can either be invested free of U.S. tax or repatriated for the taxpayer's use and enjoyment.

Abusive Insurance Arrangements - Some promoters have devised arrangements that are characterized as insurance arrangements, giving rise to a deduction for the U.S. taxpayer for "premiums" paid to a purportedly unrelated offshore insurance company. Often these arrangements are merely self-insurance, lacking in real transfer of risk.

Shifting of Income Using Offshore Private Annuities - Some promoters suggest that U.S. taxpayers may avoid or substantially defer tax on income streams or capital gains by exchanging property for an unsecured private annuity. In another abusive scheme an offshore private annuity is used in conjunction with an offshore variable life insurance policy as a devise to "decontrol" a foreign corporation or other entity used in an abusive sequence of transactions. As a result the promoter claims that the foreign corporation or entity is owned by the insurance policy and is not a, controlled foreign corporation, passive foreign investment company, or any entity controlled by a U.S. person whose income could be taxed in the United States to its owner.

Offshore Internet Business - For businesses conducted primarily through the internet, promoters offer "kits" which give the appearance that the business is foreign owned and operated. Transactions may be routed through offshore servers, and business receipts may be collected through offshore bank accounts or credit card merchant accounts. These schemes particularly target businesses that offer delivery of computer software and other digital products such as music, pictures, or video. They may also provide a means of operating offshore gaming activities.

Offshore Wagering - Over the last few years, gambling websites have proliferated on the Internet. Many of these virtual casinos are organized and operated from offshore locations, where the operators feel free from State and Federal interference. The operators of these activities may suggest that players in the U.S. are not subject to tax on their winnings, and may handle collections and disbursements in ways designed to facilitate avoidance of U.S. taxes.

Repatriation of Offshore Funds Using Credit Cards (such as MasterCard and VISA) issued by tax haven domiciled banks are a preferred method used by U.S. taxpayers to anonymously and covertly repatriate offshore funds that may or may not have been previously taxed. American Express cards are used in the same way but differ in that these cards are issued directly by American Express rather than by member banks.

Original link to I.R.S. - http://www.irs.gov/businesses/small/article/0,,id=106559,00.html

People Don’t Live In Delaware. But They Keep Their Money There.

We see lots of discussion about the "best" legal & financial jurisdictions. If you are familiar with my writing or the work we do in protecting billions of dollars for our clients you know what I think of most domestic jurisdictions and that we think that they have little or no value for Asset Protection despite any nominee corporation b.s. and promises of secrecy that the snake-oil salesmen in various states pedal.

The link below is to an interesting piece about Delaware, which is also now promising Asset Protection through domestic asset protection trusts that we never use because they fly in the face of full faith and credit laws and we don't want our clients to be test cases.

Yours, Ike

See the story here on DEALBREAKER:

Its beaches don’t compare with those of Bermuda or the Cayman Islands. You can’t ski there. But the most boring state in the union is best damned tax shelter on earth.

The First State is finally first at something else, according to the Tax Justice Network. It’s the best place for non-Americans to hide from their taxmen, earning the august moniker, “most secretive financial jurisdiction.”

http://tinyurl.com/DELAWAREWTF

ARE YOU AN ACCIDENTAL TAX CHEAT? THE IRS IS LOOKING FOR YOU.

The IRS is currently running a "Voluntary Disclosure Opportunity" that expires October 15, 2009.

You have likely heard reference to this amnesty event in the context of allowing those with "secret" offshore accounts (see my other posts on this amateur practice) to report them and get square with the tax man - but there are many other situations that require reporting and which are often intentionally or accidentally overlooked - be sure you and your clients are fully aware.

If any of the following situations apply in your case, make sure that you file proper forms to report these transactions and if required declare income prior to the extended deadline of October 15, 2009 in order to avoid severe and harsh penalties including criminal penalties:

1. Do you have a foreign bank account including a security account, credit
card account etc outside the United States that you did not report as
required by law?

2. Do you have unreported income from a foreign country?

3. Do you own any unreported foreign entities such as corporations, trusts,
partnerships or disregarded entities?

4. Do you own Mexican real estate through Mexican Bank Trusts?

5. Do you have rental income from property outside the United
States?

6. Did you receive unreported inheritance from outside United States?

7. Are you a beneficiary in any trust formed in foreign jurisdiction? Did
you receive any unreported distribution from the trust?

8. Have you sent money outside United States by way of loan, equity etc in
last few years and not reported it to the IRS?

If any of the above situations apply to you, please contact professional accounting help as soon as possible so that they can help you - Penalties will be exceptionally harsh after October 15, 2009.

My thanks to Pallav Acharya, CPA, FCA, CIM of CPA global Tax & Accounting
for this list. Phone: (480) 889-8949 - Pallav is in Scottsdale, AZ and works with clients all over on international taxation issues.

UNREPORTED FOREGIN BANK ACCOUNTS - DEADLINES AND PENALTIES LOOMING

People who haven't reported ownership of foreign accounts by September 23 may face jail time and fines.

By Seth J. Entin

Mr. and Mrs. Doe, who are U.S. citizens, have an account with a foreign financial institution. The Does have never reported their ownership of or the income from this account on Schedule B of their U.S. federal income tax returns, and they have never filed Treasury Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR), which they are required to do to disclose this account.

SEE THE WHOLE STORY HERE: http://www.fa-mag.com/online-extras/4478-wednesday-deadline-approaching-for-foreign-accounts.html

MOST COMMON ABUSIVE TAX SCHEMES - WHAT THE IRS SAYS

I continually warn clients and advisors that there are good and bad methods, tools and practitioners in every business including Asset Protection. The worst plans I see combine abusive tax plans with supposed Asset Protection benefits. These plans typically involve IBCs, Nevada Trusts, and Domestic Asset Protection Trusts in some combination. Generally speaking these are the WORST tools to use for a variety of reasons. We use offshore tools effectively and legally everyday for Asset Protection and other issues. The tools we use are explicitly TAX NEUTRAL because we don't want our clients relying on these tools for protection and estate preservation and fighting the IRS at the same time, a common fatal flaw that is spawned by greed and promises of tax savings that top professionals will never make. Below is what the IRS has to say in their own words.


Yours, Ike


Tax evasion using foreign jurisdictions is accomplished using many different methods. Some can be as simple as taking unreported cash receipts and personally traveling to a tax haven country and depositing the cash into a bank account. Others are more elaborate involving numerous domestic and foreign trusts, partnerships, nominees, etc. The following schemes are not all-inclusive, but just a sample of abusive tax schemes.


Abusive Foreign Trust Schemes: The foreign trust schemes usually start off as a series of domestic trusts layered upon one another. This set up is used to give the appearance that the taxpayer has turned his/her business and assets over to a trust and is no longer in control of the business or its assets. Once transferred to the domestic trust, the income and expenses are passed to one or more foreign trusts, typically in tax haven countries.

As an example, a taxpayer's business is split into two trusts. One trust would be the business trust that is in charge of the daily operations. The other trust is an equipment trust formed to hold the business's equipment that is leased back to the business trust at inflated rates to nullify any income reported on the business trust tax return (Form 1041). Next the income from the equipment trust is distributed to foreign trust-one, again, which nullifies any tax due on the equipment trust tax return. Foreign trust-one then distributes all or most of its income to foreign trust-two. Since all of foreign trust-two's income is foreign based there is no filing requirement.

Once the assets are in foreign trust-two, a bank account is opened either under the trust name or an International Business Corporation (IBC). The trust documentation and business records of this scheme all make it appear that the taxpayer is no longer in control of his/her business or its assets. The reality is that nothing ever changed. The taxpayer still exercises full control over his/her business and assets. There can be many different variations to the scheme.

International Business Corporations (IBC): The taxpayer establishes an IBC with the exact name as that of his/her business. The IBC also has a bank account in the foreign country. As the taxpayer receives checks from customers, he sends them to the bank in the foreign country. The foreign bank then uses its correspondent account in to process the checks so that it never would appear to the customer, upon reviewing the canceled check that the payment was sent offshore. Once the checks clear, the taxpayer's IBC account is credited for the check payments. Here the taxpayer has, again, transferred the unreported income offshore to a tax haven jurisdiction.

False Billing Schemes: A taxpayer sets up an International Business Corporation (IBC) in a tax haven country with a nominee as the owner (usually the promoter). A bank account is then opened under the IBC. On the bank's records the taxpayer would be listed as a signatory on the account. The promoter then issues invoices to the taxpayer's business for goods allegedly purchased by the taxpayer. The taxpayer then sends payment to the IBC that gets deposited into the joint account held by the IBC and taxpayer. The taxpayer takes a business deduction for the payment to the IBC thereby reducing his/her taxable income and has safely placed the unreported income into the foreign bank account.

Original Link:http://www.irs.gov/compliance/enforcement/article/0,,id=105822,00.html