Wealthy Americans are Targets for Second Passport Shams

Wealthy Americans are Targets for Second Passport Shams

Wealthy Americans are Targets for Second Passport Scams

At Golding & Golding, our international tax law firm specializes exclusively in offshore disclosure and expatriation. Expatriation is the process of formally renouncing U.S. citizenship or terminating Long-Term Permanent Residency. 99% of the time, taxpayers do not expatriate as any sort of  ‘Plan B global citizen/offshore nomad tax strategy’ that they stumbled across on the internet.

Why?

Because almost always, these are scams. The typical high-net-worth individual (HNWI) or Ultra-High Net Worth Individual (UHNWI) who expatriates does so not because they think they can avoid U.S. taxes by going offshore, but rather because:

• • • they overstayed their green card and did not realize they became long-term residents and want to minimize the damage, or

    • they are dual citizens in a country where they previously lived and worked (or have family) and do not plan on working or traveling to the United States in the future.

First, Most Marketers (and their ‘Network’) are Not Qualified to Assist you.

Online marketing shysters want you to believe that lots of entrepreneurs across the United States are moving offshore to avoid U.S. tax, but it is simply not the case — it is just a marketing ploy designed to make you think that you too can get in on the action, go overseas and avoid U.S. taxes. First, wealthy entrepreneurs who have spent a lifetime building their wealth are not going to rely on some online marketer — with no tax or legal background – to assess what to do with their 8 and 9-figure wealth. That would be like paying someone with no culinary background the same price you pay a three-star Michelin chef to cook the same meal just because that person ate a meal at a three-star Michelin restaurant. Let’s look at some examples of what happens in real life.

\*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.

First, what is your Ultimate goal?

Yes, you want to pay less tax AND these shysters know that, so they prey on your desires to avoid taxes knowing you are watching their marketing presentations — but without explaining what comes next in your life after you move offshore. Sure, the videos may show glamorous settings and high-end properties but is it feasible and will you save money? If you’re a US person and your goal is to reduce your tax liability by going offshore then 9 out of 10 times you are going to have to formally expatriate. You will be considered a covered expatriate and this will result in an exit tax. In addition, if you are considered a covered expatriate at the time you exit, it will impact your ability to form a business overseas and give gifts to U.S. citizen relatives — since the latter will come with a hefty gift tax that has to be paid at the time the gift is made.

Are Global Citizenships Good?

If you are a U.S. citizen and you want to reduce your U.S. taxes by going offshore, chances are you will land on one of a few YouTube marketing websites that will lead you down a rabbit hole and into believing you must purchase (through them as the middleman receiving a large fee) one or more global citizenships. What they fail to tell you is the real-life tax implication:

• • • Example: Brian purchases a global citizenship with the idea that he may expatriate in a few years. In the meantime, as part of the purchase he is required to invest in certain investments funds in that foreign country. He also must maintain that investment for several years. But, since he is still a U.S. person with foreign fund investments he is now required to file multiple international reporting forms such as the FBAR, Form 8938 and Form 8621 — or risk significant fines and penalties.

    • Example: Belinda purchases a global citizenship with the idea that she wants to travel the country in anticipation of moving overseas, but she does not want to use or give up her U.S. citizenship/passport.  The company convinces her that purchasing the global citizenship is a good idea. She moves some of her foreign assets into this country and into a neighboring country based on the advice she received (non-legal, non-tax advice).  As she begins to put together, her estate attorney explains that since she has foreign assets the estate plan has become much more complicated (and expensive) and that foreign country has its own specific tax and fees for non-residents who maintain assets in that foreign country — something her ‘global citizen marketer’ failed to tell he when he convinced her to pay 6-figures to purchase a global citizenship.

Will You Even Lower Your Taxes?

The way these marketers sell you is that they know you want to pay less tax (who doesn’t want to pay lower taxes, right?). They know you have worked hard for your money and if you land on their website, YouTube channel, or Instagram page — you have now entered their rabbit hole and this is their only opportunity to sell you. Oftentimes it is the long con with several videos that all fail to explain that your overall net effective tax liability does not go down, but may even go up!

• • • Example: Charlie decides that he wants to move offshore and he uses one of these services to help him transition overseas. The company starts out responsive and (seemingly) helpful but then over time the response time wanes. After speaking with a tax law specialist, Charlie learns the company failed to inform Charlie that now that he lives overseas in the foreign country as a resident he has to pay a income tax rate higher than he would have paid in the U.S. under the country’s resident rules. In addition, the investments that Charlie made in a third party country are taxable in that other country as well as in the United States because Charlie is still considered a U.S. person.

    • Example: Against his better judgment, Chris hires one of these marketers to assist him with expatriating. The company pitchman is not a tax attorney nor a CPA. While he gets Chris to begin the process, he fails to tell Chris that even though his equities are below $2 million, since Chris has $6 million in foreign pension that was all accumulated while he was a U.S. citizen living overseas he now has to pay a six or seven figure tax bill when he expatriates (the step-up rules would not apply). This will also impact Chris’ ability to give future gifts to other U.S. family members which he was hoping to do tax free but now that he is a covered expatriate, the recipient will have to pay upwards of a 40% tax at receipt of the gift.

Offshore Trusts are Complex and Hard to Unwind

Many of these online marketers try to sell taxpayers on not only purchasing foreign citizenships but forming offshore asset protection trusts as well. Of course, the marketers do not tell the taxpayer that they receive a large referral fee from the foreign trust company. Moreover, the marketer fails to inform the client that not only are these trusts irrevocable but they often come with a very high annual licensing fee and are very tough to unwind if not impossible without forfeiting some, if not all of the assets in the trust.

• • • Example: Evan is a U.S. citizen who is considering giving up his U.S. citizenship. He was sold into one of these Plan B ploys and decides to not only purchase a global citizenship but he also forms an offshore asset protection trust. Evan was not planning on moving overseas for a few years, but he now has to pay a five-figure annual fee just to maintain the trust. And, even though he no longer wants to keep the same asset, the trust the decanting rules are very complex and the fee to transition some assets out of the trust and new assets into the trust are not worth it.

    • Example: After a few years, Evan determines that he was misled and that he no longer wants to give up his U.S. citizenship. Evan wants to dissolve his offshore asset protection trust, but unfortunately since it is an irrevocable trust it is not possible for him to cancel the trust at this time. In addition, he is unable to access some of the funds that are in the trust. So now not only does he have a trust that he no longer needs or wants, but he cannot access the money in the trust and he has an annual five-figure administrative fee for keeping the trust active (which he must do in order to avoid forfeiting the assets in the trust).

Are these Foreign Countries You Want to Invest in?

For taxpayers who are high net worth and want to reduce their offshore taxes, it is important that they carefully evaluate the different countries where they may consider living and where they may consider investing. It is important to note that in several of these foreign countries where these pitchmen try to sell places to invest are locations in which the government is unstable and so are the currency and banking systems. Likewise, leaving properties unattended may lead to other issues, such as adverse possession.

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.