For those who have waited until now to decide what to do with old-time offshore secret accounts, is the "handwriting on the wall?" Is it time to declare the previously secret income and pay the taxes, plus interest and penalties? Or will that merely result in spending some time in "Club Fed?"

Jay Adkisson made an interesting observation in an email message to the ABA Asset Protection Planning Committee. He basically reminded the lawyers on that list that:

" ... if you assist a U.S. person with 'remediation' of an offshore account - including repatriating the money into the U.S. so that it is taxable on a 'go forward' basis - you can be held criminally liable for money laundering. ... In one of the cases, a CPA tried to convince a client to go back and file returns for unreported offshore accounts. The client wouldn't do this because of the heavy penalties, so the CPA compromised and formed a new company in the U.S. into which the foreign moneys came in as capital. Although the company started paying taxes on the money from that time forward, the CPA was successfully prosecuted for money laundering on the basis that he had helped 'disguise' the clients past tax evasion by 'cleaning' the money on a go-forward basis." (emphasis added.)

Jay urged the other lawyers on the list to refuse to discuss the matter with anyone who approaches them and to refer them to a criminal defense tax lawyer. This is a very specialized field of law that requires a lot of experience and someone who does a lot of this kind of work.

So what does that imply for the taxpayer who is wondering what to do with a secret offshore account? At a minimum, the taxpayer can expect to have to pay the back taxes, plus interest and maximum penalties. It's possible that the IRS might attempt to pursue some criminal charges, but they seldom do that when a taxpayer comes forward on his or her own account without having yet been audited or otherwise "found out." The best approach is to contact a criminal tax defense lawyer and discuss your options with the lawyer. The conversation with the lawyer will be protected by the attorney-client privilege and you will not be compelled to settle up. The lawyer can advise you of the consequences of not settling and even of leaving the country but he or she will not be able to advise you how to circumvent the law.

The consequences will be much less severe if you do settle with the IRS without having been caught or found out. If you take your chances and wait to see if they find you in one of their fishing expeditions (like their subpoena of the credit card company records or the disclosure of client information by a foreign banker or promoter who is accused of money laundering), they may elect to pursue criminal charges and you will have less bargaining room.

If the cost was more than you could bring yourself to pay, could you just leave the country? Perhaps, but that would not relieve you of the tax liability and you would need to be sure you locate in a country that does not permit extradition of criminals to the U.S. With the recent international concern about terrorism, there are few countries left in the world where real secrecy is still available.  
 
If You Need Help In "Coming Clean"

If you have only been thinking about trying to open a secret foreign bank account, or setting up a secret foreign corporation or secret foreign trust, I hope this article will save you some grief by helping you to appreciate that you are trying to "swim up a waterfall". 

But if you have already opened one or more unreported foreign accounts, a foreign corporation or a foreign trust, you basically have three choices.

1.  You can move permanently to a country that does not have an extradition treaty with the U.S.

2.   You can spend a lot of your time looking over your shoulder for the long arm of the IRS and spend many sleepless nights worrying about who is going to tell on you. 

3.   You can "come clean" by filing the required back returns and amended returns, with the payment of any back taxes and interest. You should also be prepared to pay whatever penalties the IRS may impose. If you won't or can't do that, then you should reconsider option # 1, above. 

Your choice may depend on the amount of potential back taxes, penalties and interest in relation to the liquidation value of your net worth. If you spent the taxes that you didn't pay, you will need the help of a good criminal tax attorney -- assuming you are at least able to pay his or her fee. If you are fully prepared and able to make restitution for all the back taxes, penalties and interest, you will also need a tax accountant who can prepare the special tax returns that are likely to be required. 

If you have a controlled foreign corporation, you will need to file Form 5471 and 926 for each year that the corporation was in existence. 

If you put money into a foreign partnership, you will need to file Form 8865 for the years the partnership was active.

If you had money in a foreign trust, you will need to file Form 3520-A for each year and you will  have to file Form 3520 for each year in which there were any transactions with the trust. 

If you had money in a foreign investment corporation (mutual fund) that was not also a controlled foreign corporation, then you will need to file Form 8621 for each fund, for each year.

No matter which form of entity you had, if you or any of these entities had more than $10,000 (in the aggregate) in any combination of foreign financial accounts, you will need to file Treasury Department Form 90-22.1 to disclose the existence and location of the accounts. 

If you had any combination of these foreign entities, you might have to file all of these forms or whichever ones apply for each prior year. 

You will also need to prepare accounting statements and income statements for each entity for each year so that the required returns can be prepared. In most cases, the accounting work is the most time consuming and the most expensive. 

Whoever you hire as your accountant will have to prepare amended personal income tax returns for each back year. Amended state income tax returns may also be required. 

The forms described above are not the kind of forms that most tax preparers work with on a regular basis. They are dramatically different from the kind of forms that most tax accountants prepare and will require a lot of time for the accountant to read and understand the instructions. In my opinion, if a tax accountant has not prepared a number of these forms previously and does not do this kind of work on a continuing basis, either the accountant will not be able to charge enough for the time that will be required, or the forms will be prepared inadequately or incorrectly. By way of example, hardly any of the professional tax preparation software programs include these forms. Your accountant will have to do them by hand. 

Source:  By Vernon K. Jacobs - The Offshore Press, www.offshorepress.com

Vernon K. Jacobs is a CPA, a Chartered Life Underwriter and a Fellow of the Life Management Institute. He is an international tax practitioner and tax author with a focus on international investing and insurance. He has been a college instructor in accounting, personal finance and corporate taxation, and has been a speaker at dozens of professional conferences and seminars. www.vernonjacobs.com

Maxim Global Wealth Advisors is a premier wealth advisor for both American expatriates and foreign nationals with a connection to the US.  Maxim specializes in comprehensive wealth strategies including investment management, tax strategies, and retirement planning.  We created our Knowledge Library in order to help expats and multi-nationals increase their financial intelligence and to enable well-informed decisions. We hope you find this information useful and we invite you to contact us for more information on our wealth management services.

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