Tax Considerations When Dealing With Foreign Transactions
April 28, 2016
As a follow-up to questions, about tax considerations when dealing with foreign transactions , one of the big areas of concern is the area of foreign entities and the income effects that they have on our person tax returns. Controlled Foreign Corporations have a unique capability of delaying the paying of tax until the income is removed and used personally. The government is of course is looking into the abuse in this area like many areas in the Foreign sector. Not all income accumulated in these Controlled Foreign Corporations can be tax deferred. If the income is earned income i.e. a function of actual work it can be deferred . Passive income like rents are not considered earned income, but are Sub part F income and therefore taxable on the personal tax return. Also, there are certain rules that apply if you have a series of Foreign Corporations in different countries. That could make the income Sub part F income.
In today’s income tax world all Foreign Corporations (5471),Trusts (3520 and 3520a),Partnerships, and Bank Accounts FBARs (114) have to be reported to the IRS, so every place you might think you can put your assets without disclosing the location is being blocked. In addition, individuals who buy and sell precious or strategic metals are considered to be financial institutions, if they store those items for their clients. With almost all countries complying with the FATCA rules and then things like what happened in Panama where an individual distributed all of a law firms documentation on hidden accounts it will be virtually impossible to not report all income. If the income is determined to be taxable then you are in a tax invasion situation. In addition, foreign countries realize that the United States has already collected at least $10,000,000,000 using the Voluntary Disclosure program, and have started to move toward the same type of program and are looking for the income that has not been reported to their own countries. There has been an investigation that has expanded from Switzerland to many additional countries, i.e. Belize, Cayman Islands, Israel, India, etc. . As people come forward voluntarily the U.S. government uses that information to get the banks in those countries to forward all United States citizens account information.
In Belize Bank of America facilitated the transfer of money to and from that country. The U.S. government cut off the U.S. bank as a correspondent bank and sent out John Doe summons to uncover. We have done many Offshore Voluntary Disclosure for citizens and it has been amazing how much unreported income there is today. The main question is was it done purposely or was it inadvertent. The penalties can be unbelievable and possible jail time if tax evasion can be determined. The process goes through many phases and a final certification by the IRS is done to audit the situation. We recommend to clients to report all foreign transactions and entities, the tax and professional costs are enormous.