A Guide to Moving Money Offshore Legally, Pros and Cons

A Guide to Legally Moving Money Offshore

Especially for taxpayers who may be new to the United States tax system, it can come as a shock and a surprise to learn that not only does the United States tax individuals on their worldwide income, but they require taxpayers to report their global assets, accounts, and investments each year depending on the value of the money and the category of assets. When faced with the IRS transparency ramifications of being a U.S. person, some taxpayers’ knee-jerk reaction may be to simply move their money offshore to try to avoid the long arm of the U.S. government. Unfortunately, moving money offshore does not necessarily accomplish the intended goal of the taxpayer and can only make matters worse in other cases when the taxpayer realizes all the different international information reporting requirements they now have. Making matters worse, there are those attorneys who falsely claim to be specialists or ‘Board-Certified Tax Law Specialists,’ but are not actually board-certified and do specialize in this area of tax. Oftentimes, these tax lawyers put taxpayers into a worse position than they would have been in had they understood the pros and cons of moving money offshore. Before any U.S. person decides to move their money offshore, they must understand whether moving the money to a foreign country will achieve the intended benefit they’re seeking or will just make it more complicated for them in terms of accessing the money and making their tax returns more complex. To assist taxpayers, we created a guide to helping taxpayers ‘legally’ move money offshore.

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

First, Moving Money Offshore is Not Illegal

Oftentimes, the term offshore connotes something improper or illegal (offshore trusts; numbered accounts), but this is often not the case. The first thing to consider is the mere fact that a U.S. person moves their money into a foreign account or asset does not make it illegal. In other words, there is nothing inherently illegal about moving money offshore. And, for IRS purposes it is also important to note that the U.S. government uses the term offshore interchangeably with words such as foreign, abroad, and international. The question then becomes why is the person moving money offshore and is the method that they are using to do so is legal or not.

Also, Beware of the U.S.’ Worldwide Income Tax Implications

Another very important concept that U.S. persons who are moving money offshore must remember is that the U.S. follows a citizenship-based taxation model. What that means, is that if a person that’s considered to be either a U.S. citizen, lawful permanent resident, or foreign national who meets the substantial presence test, then they’re subject to US tax on their worldwide. Therefore, even if the money is generated overseas and the taxpayers are in compliance in the foreign country with paying tax on the income — or even if the income is exempt in the foreign country — the taxpayer is still required to report the information on their U.S. tax return and pay US taxes on the income, although they may qualify for foreign tax credits which may reduce or eliminate the overall U.S. tax liability on the foreign income.

Hiding Money Offshore: Legal vs Illegal

Not only is moving money offshore legal, but even if a taxpayer wants to hide money offshore, that is not necessarily illegal, depending on the purpose of hiding the money. For example, if a taxpayer simply thinks his money will be safer by moving it into an offshore tax haven and currently has no creditors coming after their assets or involved in any sort of litigation — and the taxpayer is not seeking to hide the money from the courts — then merely moving money overseas in a hard-to-reach account is not illegal.

Let’s look at an example:

Accounts in Hard-to-Reach Countries

David is a U.S. citizen who is thinking about expatriating and relocating to a foreign country. He is worried that one day the U.S. government may fail and that he will not be able to take out the money that he needs from his U.S. bank accounts that he has at reputable U.S. financial institutions. Therefore, David opens up two bank accounts in offshore tax haven countries that do not have tax treaties with the United States and that have not entered into a FATCA agreement with the United States — so that there is no automatic exchange of information. David merely moving his money into a tax haven country is not illegal even though he thinks that he is hiding it from the U.S. government. While this is not inherently illegal, the question then becomes whether David is properly reporting the money that he is required to report.

Intentionally Not Reporting the Money

Now that David has moved $700,000 into two foreign accounts, David has some reporting requirements that he must adhere to. Based on the value of the foreign accounts, David is required to file an annual FBAR and Form 8938. Even though the U.S. government has not entered into a FATCA agreement with the foreign country, David is still required to report the account on Form 8938 (FATCA), because he is a US person, who has a Form 1040 filing requirement, and he has exceeded the threshold value for having foreign accounts.

If David intentionally does not report the money or does not make sufficient effort to try to figure out if he has any reporting requirements, then David can get hit with some significant fines and penalties — depending on whether the U.S. government takes the position that David non-compliance was willful or non-willful

Offshore Asset Protection Trusts 

Another common way that taxpayers try to move money offshore to avoid the U.S. government is by opening an offshore asset protection trust in a country such as Nevis or the Cook Islands. Just moving the money into an offshore asset protection trust is not illegal. In fact, many people use these types of trusts for different reasons coming with the ultimate goal of protecting their assets by forming an international irrevocable trust. If David moved the money into one of these trusts because he wanted to protect himself in case something happened in the future, but he is not currently under litigation or lawsuit, then forming the trust is probably fine. But, if David is already being sued and has creditors coming after him and is intentionally trying to hide the money in one of these offshore asset protection trusts — that may be considered illegal because the purpose of the trust is to avoid creditors who may otherwise be entitled to their claim against the asset — especially if the claim was created before David moved the money to an offshore asset protection trust.

International Reporting Requirements

Depending on which type of foreign investment a taxpayer has, there may be one or several international information reporting forms that the taxpayer may have to file. Some of the more common international reporting forms include:

• • • FBAR

    • Form 8938

    • Form 8621

    • Form 5471

    • Form 8865

    • Form 3520

    • Form 3520-A 

A Few Common Tax Traps to Be Wary of

For taxpayers who are considering moving their money offshore, here are two important tax regimes that they should be cautious of before making certain investments which could lead to a significantly higher tax liability than if they made the same investment into their U.S. counterpart version of these foreign investments.

PFIC

A PFIC is a Passive Foreign Investment Company. Most taxpayers, get stuck in the PFIC matrix when they invest in a foreign mutual fund, foreign ETF, or possibly a unit trust. These types of investments are PFIC, and they get taxed at a much higher tax rate than they would ordinarily be taxed if that same income was generated from a US-based mutual fund or ETF for example. This is especially true in situations in which the foreign investment generates excess distributions. While taxpayers can make an election to reduce the overall tax liability, it does require cooperation from the foreign financial institution which is not always possible and if the election is not made in the first year, late elections can have a negative tax implication as well.

Subpart F and GILTI 

For taxpayers who are considering forming a foreign holding company, not only do they have to negotiate the PFIC regime, but they may also be subject to Subpart F income and GILTI. With this type of income, taxpayers may have to pay U.S. taxes based on their ratable share even if no income has been distributed to them in the year. This can be very disconcerting for taxpayers, especially because if the income was not distributed then they presumably do not have any foreign tax credits to offset the income tax in the United States. These types of tax implications tend to rear their ugly head in situations in which a taxpayer invests in a foreign holding company that is owned by more than 50% of U.S. persons and the taxpayer invests or owns directly or constructively 10% or more of the company.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.