Wealthy Investors Beware of Foreign Investment Passports (Examples)

Wealthy U.S. Investors Buying Foreign Citizenship Beware (Examples)

Wealthy U.S. Investors Buying Foreign Citizenship Beware (Examples)

Unfortunately, there is a lot of misinformation on the World Wide Web when it comes to offshore tax strategies and international assets. Around every corner, you can find non-legal, non-tax professionals purporting to be experts in offshore tax matters for no reason other than the fact they moved abroad. These shysters goad unsuspecting wealthy U.S. citizens into believing they need an offshore tax Plan B or C. More often than not, these offshore tax plans will not do the U.S. Taxpayer any good — and in fact, will result in significant costs to the Taxpayer which they will never recoup. In addition, purchasing these types of tax promotions will put a Taxpayer into a much more precarious position with the IRS — especially if they have offshore assets and investments which they are now required to report as part of the international information reporting requirements for U.S. persons. Before considering an Offshore Plan B, Taxpayers should consider maximizing their ‘Plan A’ before spending hundreds of thousands of dollars for purchasing offshore plan B and C strategies.   

Several times each year we get approached by taxpayers who were told that they should consider moving offshore and becoming a ‘global tax nomad’ to avoid U.S. taxes — and the process usually begins with the taxpayer purchasing Citizenship-by-Investments in countries they would presumably never live or reside.

It is the legal equivalent of ‘Bro-Science.’

Let’s look at some examples of the risks posed by U.S. citizens investing in foreign citizenships.

First, Is it For ‘Plan A’ or ‘Plan B’

Some U.S. Taxpayers who are ready to expatriate and renounce their U.S. citizenship are already established in the country they reside. Still, for one reason or another, it takes a significant amount of time for that country to issue citizenship – and the Taxpayer does not want to wait. From a legal perspective, a U.S. Taxpayer cannot legally renounce their U.S. citizenship until they have obtained citizenship in a second country. For citizens who are seeking a citizenship-by-investment opportunity for this purpose, it can be very beneficial. This is the Taxpayer’s ‘Plan A,’ not their Plan B – and these are not the type of situations we discuss below.

This article serves as a warning to some taxpayers who are only considering expatriating and giving up their citizenship but are being led astray by self-proclaimed experts having them believe that acquiring these costly ‘what if’ strategies, will ultimately reduce their tax liability and protect them from when the world implodes — when in fact it will usually cause the opposite effect (read: costing Taxpayers hundreds of thousands or more in taxes and fees).

*These examples are designed to provide some insight as to what the charlatans online will not tell you at the time that you’re seeking to obtain a Plan B. They are not country-specific.

Out of Compliance and Scared Example

• • • David is a U.S. Citizen who has foreign accounts and assets outside of the United States. He was under the misbelief that since the money was overseas, he was not required to report the information on the U.S. tax return and had never heard of any of the international reporting forms such as the FBAR or Form 8938. He begins feverishly researching online and lands upon a YouTube channel that leads him to believe that he will go to jail or prison if he does not get into compliance and that he will automatically be penalized 50 to 75% of his net worth – and his utopia lies in buying offshore citizenships and investments in countries David has never had any intention to travel to or live in.

    • David goes down this rabbit hole and ends up paying a non-legal, non-tax person upwards of $100,000+ to help obtain foreign citizenship by investments.

    • After executing this plan, David realizes he does not want to leave the United States. He consults with a Board-Certified Tax Law Specialist specializing in offshore matters, who explains to him that since he was non-willful there are many options available for him to get into compliance. None of these options will result in him going to jail or prison although he may have to pay a reduced penalty — and may even qualify for a penalty waiver. The attorney further explains that because he established these other plans in a foreign country, he now must report these additional assets as well and he may be assessed significant taxes as a result of investing in foreign mutual funds which was required as part of the citizenship by investment program — which are deemed PFIC under U.S. Tax Law.

Ready, Fire, Aim with an Irrevocable Offshore Trust

• • • Michelle is a U.S. Citizen who is considering renouncing her U.S. citizenship but is only in the early stages of determining whether she wants to give up her status. She researches dual citizenship and lands on a website that offers offshore tax strategies, Second citizenship, and offshore Plan B. It turns out that this website is not run by an attorney or tax professional and is not based in the United States where Michelle lives. Against her better judgment, Michelle pays close this $100,000 to this website to obtain second citizenship and a ‘just in case’ tax plan. At the same time, this company convinces Michelle to open an offshore trust in this country and they put multiple assets in the country.

    • Michelle soon realizes that she does not want to renounce her U.S. citizenship and does not need this second citizenship, so she wants to terminate the foreign country’s citizenship.

    • When she speaks with an attorney in that country, she learns that she must maintain the citizenship for multiple years or she will be considered to have defaulted on the investment. In addition, she must be a citizen of that country to maintain the type of trust she has there and if she gives up that citizenship, she will have to pay tens of thousands of dollars a year to manage the trust as a non-citizen. Since it is an irrevocable trust, she cannot simply cancel the trust.

    • Michelle may now be out several hundreds to thousands of dollars and stuck with an additional citizenship she does not want or need.

Foreign Business and Complex U.S. Reporting

• • • As part of a sales pitch, Melanie is told by a purported expert offshore planning company (also non-attorneys, non-tax professionals) that if she ever wants to go offshore at a future date she should now create multiple foreign businesses, partnerships, bank accounts, and even a trust to prepare herself in the future for when she decides to move.  (Of course, it would have to be prepared now, because how else will this company get paid…now). Michelle ends up paying this company hundreds of thousands of dollars to prepare the documents.

    • The firm does not prepare the forms correctly, accurately, or timely — and begins to suspect the reviews she read were fake.

    • Finally, Melanie decides to speak with an offshore tax lawyer specialist who unfortunately informs her that now that she has acquired all these foreign businesses and other entities, trusts, and accounts, she is required to report all of this information on her various international reporting forms such as Form 5471, 8938, 3520, etc. The company did not tell her this when it first began the process, and so now not only are the foreign assets useless to her, but she is also now out of compliance and may be subject to extensive IRS fines and penalties.

    • Adding insult to injury, the original company wants additional fees from her to unwind the foreign assets they acquired under her name and the cost to do that will be significant — and similar to Michelle above, if Melanie is no longer a citizen of that country then there are additional licensing fees and tax issues for maintaining these types of assets in that foreign country.

Always Consider the Consequences Before Acting

These days, the Internet is littered with non-tax, non-legal professionals seeking to sell you on strategies that do not work and have no basis in reality. While it is normal to want to prepare ‘just in case’ something was to happen in the United States, there are still tax and legal ramifications for establishing second citizenship and acquiring assets in foreign countries for this purpose (even when the Taxpayer still resides in the U.S.) — since most citizenship-by-investment programs require the acquisition of assets within those borders. Although it may be relatively simple to try to obtain some of these second citizenships, it is not as simple to try to terminate and re-balance the investments associated with the foreign citizenship — which can have significant financial and tax consequences.

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.