Don’t Panic! The Hitchhiker’s Guide To Offshore Freedom

I’m a die-hard science fiction fan, and one of my all-time favorites in this genre is Douglas Adams’ superb The Hitchhiker’s Guide to the Galaxy.

Only seconds before aliens demolish planet Earth to make way for an interstellar shortcut, the book’s protagonist, Arthur Dent, is whisked aboard a spaceship. His savior is Ford Prefect, an alien stationed on Earth to conduct research for an updated version of the Guide.

Upon being whisked into the spaceship, Ford hands Arthur a copy of the Guide. On the cover are the words “Don’t Panic.” “I like the cover,” Arthur says. “‘Don’t Panic.’ It’s the first helpful or intelligible thing anybody’s said to me all day.”

Against the State: An ... Rockwell Jr., Llewelly... Best Price: $5.02 Buy New $5.52 (as of 11:35 EST - Details) A few weeks ago, I received a letter that reminded me of this dialogue. It was from Bank Austria, where I had an account for several years, until closing it in 2009. The letter, which came from the bank’s “FATCA Task Force,” informed me (in both German and English) that I needed to authorize the bank to release my account information to the IRS. Otherwise, the bank would:

… report aggregate information (the total number of account holders of the Bank who do not consent, the aggregate account balance and payment amount) to the IRS. Such information may give rise to a group request by the IRS for specific information about my/our business.

Despite the Guide’s advice, I must admit I felt a brief moment of panic when I first read the letter. I was certain that I had reported the account every year that I had it open, as required. Was it possible that the bank never followed my instructions to close the account in 2009? If not, would I face IRS fines of $10,000 annually since 2010 ($40,000 in all) for failing to report the account?

Fortunately, I was able to resolve the situation quickly. I called Bank Austria and confirmed that, in fact, they had closed my account in 2009. A few days later, I received an email from the FATCA Task Force that informed me that the letter had been sent to me by mistake.

Big relief! But the incident got me thinking. I’ve spent the last 25 years or so researching, reporting, and consulting on all things offshore. How would an ordinary investor who had only recently made their first foray offshore react if he or she were to receive such a letter? Chances are, they just might panic!

And the fact is, the labyrinth of offshore reporting requirements that Congress, the IRS, and an obscure Treasury bureau called the “Financial Crimes Enforcement Network” (FinCEN) have constructed is nothing short of obscene. Except for the simplest offshore relationships, it’s almost impossible to comply without expert guidance. Kindle Paperwhite, 6&r... Best Price: $40.90 Buy New null (as of 05:45 EST - Details)

What’s more, while the IRS has taken some baby steps in recent years to reduce their severity, the penalties for violating these reporting obligations is nothing short of draconian.

But don’t just take my word for it. According to the National Taxpayer Advocate’s 2014 Report to Congress:

US citizens and residents may be required to report foreign accounts on different forms (FBAR vs. Form 8938), at different times of the year (June 30 for FBAR vs. April 15th or September 15th for Form 8938), when they reach different thresholds ($10,000 for FBAR vs. $50,000 or more for Form 8938), and using different definitions, even though the government may already know about the accounts.

The maximum civil FBAR penalty for non-willful violations is disproportionate – $10,000 per account per year for up to six years. It rises to 50 percent of the maximum account balance (or, if greater, to $100,000) for willful violations. For example, someone with a total of $10,000 in five different foreign accounts ($2,000 in each) could be subject to a non-willful FBAR penalty of $300,000 (six years times five accounts times $10,000) or 30 times the account balance. If the IRS deems the violation willful, the penalty could rise to $3 million (six years times five accounts times $100,000) or 300 times the account balance.

The report recommends that Congress:

  • Improve the proportionality of the civil FBAR penalty;
  • Require the government to prove actual willfulness before imposing the penalty for willful violations; and
  • Reduce the burden of foreign account reporting. Fintie (Blue) Premium ... Check Amazon for Pricing.

However, Congress isn’t likely to do anything to simplify these rules. Indeed, with laws like FATCA coming into full force, the rules will only get more complex in the years ahead.

There’s a reason for that. Our leaders in Washington will do just about anything to discourage international investments, including confusing reporting rules and even blatant lies as to the supposed size of the “offshore tax evasion problem,” as I discussed in this essay.

Yes, it’s enough to make offshore investors panic – even if you merely made an honest mistake.

But there’s no reason for alarm. You simply need to understand what you need to report, what you don’t need to report, and the many exceptions to the various rules. And since even seemingly simple international investments can give rise to complex reporting requirements, it’s a good idea to have an experienced international tax expert review your filings.

In any event, it’s more important than ever for Americans to park some portion of their wealth offshore. And not to panic at the awe-inspiring penalties that await for not doing it right. The advantages are compelling, especially with the dollar trading at multi-year highs. In addition to purchasing more gold, foreign currencies, or foreign securities with your dollars than you could just a few years ago, offshore investments offer:

  • Access to investment and business opportunities not available in the US;
  • Reduced portfolio risk;
  • Asset protection;
  • Increased privacy (well, from everyone other than the IRS and the Treasury);
  • Investment continuity; and
  • Tax savings opportunities (yes, they still exist).

What are you waiting for? The strengthening dollar has significantly reduced the foreign exchange risks of international investments for Americans. There’s no better time than now to “go offshore!”

Reprinted with permission from Nestmann.com.