How Expat Plan B Companies Swindle Americans (Case Study)

How Expat Plan B Companies Swindle Americans (Case Study)

How Expat Plan B Companies Swindle Americans

In recent years, there has been an increase in offshore and global tax and finance scams targeting wealthier Americans and U.S. Citizens. These offshore shysters promote a purported ‘tax-free offshore lifestyle’ that does not really exist to Americans by making them believe they can go offshore and, move all of their assets offshore — and escape the clutches of the U.S. tax system. These non-legal/non-tax professionals then goad taxpayers into believing that if they pay them tens of hundreds of thousands of dollars, they can live the dream of leaving the U.S. and spending days working on the beach while having their assets protected – and of course, not having to pay much of any U.S. taxes on their income. Luckily, many Americans will realize that it is all just a scam before it is too late, but for some unsuspecting U.S. citizens, unfortunately, they will be out hundreds of thousands of dollars or more, have lost their U.S. citizenship, and now have their assets in unprotected, unstable markets.

Let’s look at how this works through a case study example.

Case Study: Devin the American Who Wants to Reduce His Taxes

Devin is a U.S. citizen entrepreneur who has found great success in his most recent business venture. Devin has spent his entire life living in the United States. As he begins filing his tax returns for the current year, he realizes that he leapfrogged into the highest tax bracket — and since most of his work is done online as a service he provides, he does not qualify for many tax deductions. As he researches ways to reduce his tax liability, he comes across some glossy marketing materials and videos online that make it sound like he could simply go offshore, buy a golden visa, and escape the clutches of the U.S. tax system. It’s easy — all he has to do is pay the offshore/global service $100,000+ and they will help him obtain a golden visa and move his assets into foreign countries.

Against his better judgment, Devin decides to journey down this rabbit hole and after being led to believe utopia awaits just beyond U.S. borders, he pays a non-tax/legal service $100,000 to help him establish himself overseas.

• • • Result: -$100,000

They Do Not Explain About Expatriation Until After they have his Money

Devin decides to obtain a Caribbean golden visa which costs about $400,000 once all the investments are accounted for. Once the process begins, and only after Devin has paid this company for the services and after he submits his application, he learns for the first time about expatriation. What these ‘offshore experts’ fail to explain to Devin is that even though the Caribbean country does not have any tax, he is still a U.S. citizen. And, the United States taxes U.S. citizens on their worldwide income, no matter where they live and no matter where the income is sourced. Devin now realizes that he must renounce his U.S. citizenship to obtain the benefits of the golden visa. He is now out nearly $500,000 and second-guessing his strategy, but this company convinces him to continue and that giving up his citizenship is no big deal.

Why?

Because they still have more ways to get to Devin to pay for more services.

• • • Result: -$400,000+

Practice Tip: Giving Up Citizenship is a Big Decision for Americans

Since Devin has never lived outside of the United States, it is a big jump to go from a U.S. citizen living in the United States to a non-U.S. citizen living in a foreign country. All of Devin’s friends and family live in the United States. Devin has various functions that he wants to attend (in the U.S.), and he enjoys spending time with his family, all of whom are U.S. citizens and live in the United States. What these offshore companies failed to explain to Devin is that it can be very difficult to try to get back to the United States for any extended period. Once an American renounces their U.S. Citizenship, if they want to get it back (which they often do), they have to get to the back of the line with everybody else — and it could be difficult if not impossible to reobtain U.S. citizenship (or the specific visa they want) depending on whether or not he can qualify for any of the programs.

Additional Forms, Costs, and Fees

The foreign company that Devin hired convinced Devin he should also open a foreign entity to operate his business and two offshore asset protection trusts to manage his assets. The company’s service does not include them preparing the forms — because they are not tax professionals or attorneys. Instead, this company hands Devin off to some local attorneys and accountants who charge $50,000 for Devin to prepare these forms, fees, etc. Presumably, the company Devin hired is obtaining a referral fee from the attorneys he was referred to — although they don’t tell Devin about that.

• • • Result: – $50,000

More (Not Less) Offshore Reporting to the IRS

One of the sales pitches to Devin during this process is that once he is out of the U.S. system, he will not have to report any of this information to the U.S. government. He can operate overseas without the U.S. government knowing where his money or assets are. The problem is scheduling and completing the renouncement process can be very timely especially with holidays and shutdowns. In the meantime, Devin must report all of his foreign accounts, assets, and investments to the U.S. government. So instead of filing a relatively straightforward tax return with high income, Devin now has to file several international information reporting forms each year. Luckily, this offshore company can refer him to another firm that charges him an additional $25,000+ to file the forms each year — and they probably receive a referral fee from these attorneys as well.

• • • Result: – $25,000+

New Taxes and Fees Devin Must Pay

Now that Devin has created companies overseas, he is required to pay annual licensing fees in foreign countries. Maintaining foreign business in some of these countries can cost thousands of dollars — even if the business is not operational yet. Likewise, as a result of investing in these foreign countries, Devin now has various U.S. tax headaches such as PFIC, GILTI, etc. which require a specialist to assist him with handling both in the U.S. and abroad.

• • • Result – $25,000+ in annual fees

Can Devin Unwind this Mess?

Ultimately, after communicating with his family and looking at the pros and cons, Devin decided that this was not what he needed. He decided to cancel his golden visa before the application was complete and luckily, he was able to get his assets out of the foreign country. Unfortunately getting the assets out of the foreign countries comes at a cost that includes canceling the foreign business, closing the foreign trusts, and receiving distributions from the sale of the foreign assets. It ends up resulting in another $25,000 to $50,000 in taxes and fees.

• • • Result – $25,000 -$50,000 

Can Devin Go after the company that Swindled Him?

Unfortunately, most Americans will not have the opportunity to sue these foreign scoundrels. Most of the companies operate overseas and when the taxpayer first signs up with the company, they sign an agreement where the fine print prevents any type of refund. The taxpayer may want to warn other individuals but unfortunately, there is a penalty if he writes anything negative about the company because he signed away those rights in the initial agreement back when he was looking at the operation with rose-colored glasses (whether these contract provisions are even enforceable is another issue). In considering filing a lawsuit, Devin realizes he has no way to even confirm the real name of the individuals he is working with, or what country they are actually operating from. 

It’s Ready, Aim, Fire – Not Ready, Fire, Aim

Very early in my legal career, I interned for an excellent attorney who wanted all the staff to always remember, that it is ready, aim, fire and not ready, fire, aim. People get very excited when they think they have a new opportunity, and sometimes, this excitement leads them to overlook important questions and issues to consider before engaging with a company or service. Purchasing a Golden Visa and/or formally renouncing U.S. citizenship are very complex scenarios with serious immigration repercussions. If an American with no experience is considering going offshore and renouncing their U.S. citizenship, they must speak with a licensed attorney in each foreign jurisdiction where they are considering moving to or handling the foreign assets first, and not leaving financial assets in the hands of inexperienced shysters.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.