Offshore Investment Strategies to Avoid: Are You at Risk?

Is Your Foreign Investment Firm Putting You at Risk? (Examples)

Examples of Offshore Investment Strategies to Avoid

Unfortunately, U.S. taxpayers with significant wealth can be a target for offshore investment companies who convince taxpayers to invest their money overseas to avoid U.S. taxes. To achieve this outcome, taxpayers will find themselves in shady situations which are often illegal and can lead to both civil fraud and criminal investigation by the Internal Revenue Service and Department of Justice – with the foreign investment firm couching the tax promotion as ‘sophisticated tax planning’. And, because these investment firms are located outside of the United States, they convince the unsuspecting U.S. taxpayers that the investment is not subject to the same rules and regulations as a U.S.-based firm — which is not true. Oftentimes, once the IRS and DOJ begin investigating these firms and the various Foreign Financial Institutions they work with, the investment firms and foreign banks cave to the U.S. government and ultimately provide taxpayer information even after they assured their clients that would never happen. This was the case with the Swiss Bank account fiasco of the 2000s.

Let’s look at some common examples of shady foreign investment firm practices. *For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Forming a Hollow Foreign Entity

Some foreign investment firms will recommend that taxpayers create a hollow foreign entity in which the individual is not listed anywhere on the company, but instead operates as a nominee while still controlling the accounts that are held in the entity name.

• • • Example: Brian is a U.S. citizen who wants to move a significant amount of wealth offshore. He engages a offshore investment firm with connections to a local foreign financial institution in a non-treaty country. The institution agrees to create a hollow entity that has no assets or business purposes, in which the U.S. citizen is a nominee. Unfortunately, The U.S. government gets wind of the promotion and extracts the name of the U.S. investors.

    • Example:  Barry is a U.S. citizen who recently inherited a large amount of money in a foreign country. The foreign financial institution is an institution in which his family has invested for many years. When Barry travels overseas to withdraw the money, they convince him to form an emplty entity with him as the nominee so that he can control the movement of the money through the entity without having his name directly on the paperwork. This institution is located in a country that subsequently enters into a FATCA agreement with the U.S. Government and ultimately the taxpayer’s information is provided to the IRS.

Opening Accounts Under Different Names

Even if a taxpayer uses a third-party name to open the account or to hold property if the taxpayer is the ultimate owner in equity of the property or the account then he is still subject to U.S. reporting and income tax implications.

• • • Example: Charlie is a lawful permanent resident who wants to earn a significant amount of return on his earnings but does not want to pay U.S. tax. He engages a foreign investment firm that utilizes a third party who puts the account information in that third party’s name and then allows Charlie’s signature authority on the account, although Charlie is the actual owner of the funds. This is a fraudulent transfer that could have civil and criminal ramifications.

    • Example:  Christopher is a lawful permanent resident who has several rental properties in a foreign country. He engages a local investment firm that agrees to transfer the properties into a holding corporation in which he is personally named — they also open up an account in their name so that Christopher is not located on the account, but authorize Charlie to use the account. Since Charlie’s name is not on the properties or the account, it may prove difficult to show he owns the money but unfortunately this institution also is in a country that entered into a FATCA Agreement and Christopher’s name is discovered as the account owner.

Numbered or Anonymous Accounts

Creating a numbered account or an anonymous account in which the taxpayer’s name is not identified on the account but rather a number is used to identify the individual was a more common way to try to hide funds offshore in years past, but the IRS is now aware of these types of accounts.

• • • Example: David is a U.S. citizen who recently had a relative passed away in Switzerland. He does not want to transfer the money back to the United States but he also wants to earn significant income on the money and not pay U.S. tax. He transfers the money into a numbered account so that the account is only identified by a number and not by David’s name as well as the bank being paid extra to not send any documentation to David about the account or the income generated.

    • Example:  Denise is a lawful permanent resident who plans on moving back to a foreign country in a few years. She opens up a foreign bank account but also does not want to report this information to the U.S. government, so she opens up a numbered account so that she’s not personally identified on the account. The bank ultimately enters into a deferred prosecution with the U.S. government and provides the names of the U.S. taxpayers to the IRS and DOJ.

How the IRS Finds You

While some taxpayers think if they live overseas or they moved all their money overseas the IRS is not able to find them — but the IRS has many ways to track down U.S. taxpayers who moved their money overseas and are not properly reporting it to the US government.

• • • FATCA Agreement: The United States has entered into FATCA agreements with more than 110 different countries with hundreds of thousands of foreign financial institutions proactively reporting U.S. taxpayer information to the IRS.

    • VDP/Whistleblower: When a taxpayer submits to the IRS Voluntary Disclosure Program they’re required to enter into an agreement with the IRS to provide as much information as they can and to make it truthful and to make a full disclosure. Oftentimes during the audit or examination with the agent, the taxpayer will provide information about other people associated with any account that they may have an ownership or interest in.

    • John Doe Summons: Even if the IRS does not have the exact taxpayer information, they are authorized to send a John Doe Summons allowing them to send the summons to an institution for example to obtain taxpayer information without being able to identify any specific individual to direct the summons to.

Quiet Disclosure vs Offshore Disclosure

Taxpayers who are out of compliance may goaded into committing a quiet disclosure instead of a legal offshore disclosure. Even if it is not the actual foreign investment firm that is preparing the disclosure they will refer the taxpayer to a third party who will prepare and submit the documentation for a referral fee that the taxpayer may not even be made aware of.

• • • Example: Adam is a U.S. citizen who has foreign bank accounts. Only recently did he learn that he was required to report these bank accounts to the IRS/FinCEN. He tells his CPA that he has foreign accounts but was never aware they were reportable (the CPA had never asked him before). The CPA tells him that he should just file the FBARs and Form 8938s ‘going forward’ — even though Adam has had the accounts for several years. Adam files the current year FBAR and Form 8938 but tries to throw the IRS off his tail by identifying on Form 8938 that the accounts were ‘opened in the current year’ so to try to conceal the fact that he should have filed in prior years. Adam’s account information from the Foreign Financial Institution where his accounts are held is forwarded to the IRS by way of FATCA. Adam is audited on an unrelated matter, where he doubles down and tells an IRS agent under penalty of perjury that he did not have the foreign accounts until the current year. This could potentially lead to a civil and criminal fraud investigation for knowingly making false statements to the IRS both on the tax return and in the audit.

    • Example: Adrian is a lawful permanent resident who came to the United States 10 years ago. When he first came to the United States he learned about FBAR reporting but he did not want to report the accounts, so he intentionally did not report them — even though he knew he was supposed to. He also does not include any of the income from his foreign accounts. After retaining a new CPA, the CPA told them that he should not submit to the voluntary disclosure program (due to the large penalty) but would not qualify for the Streamlined Procedures since he was willful. Instead, the CPA tells Adrian to file several tax returns, but not to worry about reporting the foreign income to minimize the audit risk. Unfortunately, one of Adrian’s partner submits to the voluntary disclosure program and identifies Adrian as someone who has had foreign accounts for many years and always knew he was supposed to report them and the associted income. Adrian finds himself under criminal investigation for fraud and the CPA finds himself under investigation as well.

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.