by Asher Rubinstein, Esq.

Over the last few years, the U.S. government has enacted a series of laws and regulations designed to create greater transparency of assets held overseas by U.S. taxpayers.  In order to track and tax those foreign assets, the IRS has created Form 8938, Statement of Specific Foreign Financial Assets, a new form which requires taxpayers who own certain specified foreign assets to disclose these assets annually to the IRS.  Many taxpayers who own such specified foreign assets are now required to file Form 8938, or risk being penalized by the IRS.  The requirement to file new Form 8938 is already effective.  The form is due by April 17, 2012, along with your Form 1040, for calendar year 2011.

The new form is broad in its coverage of foreign assets that require disclosure.  Foreign assets required to be reported include:

  • foreign bank and brokerage accounts (which are already reportable on Form TD 90-22.1, Report of Foreign Bank and Financial Accounts, known as the “FBAR”);
  • stock of foreign corporations and interests in foreign limited liability companies (LLCs), partnerships and other entities, whether publicly traded or privately held;
  • interests in foreign Exchange Traded Funds (ETFs) (but interests in Passive Foreign Investment Companies [PFICs] that are reported on IRS Form 8621 need not be repeated on new Form 8938);
  • interests in a foreign entity such as a trust or foundation;
  • ownership of investment instruments and contracts issued by a foreign entity, including foreign annuity contracts and insurance policies (also already subject to FBAR disclosure);
  • interests in a foreign investment fund, hedge fund, mutual fund and private equity fund (but note the PFIC exemption above);

Note that even though certain foreign assets may not be reportable on new Form 8938, these assets may still be reportable on other IRS forms and on the FBAR.  Note also that even though an asset is already reportable on, e.g., the FBAR, it may be reportable on Form 8938 as well, notwithstanding the resulting redundancy.  It is also important to note that even if a foreign asset is not reportable if directly owned (e.g., real estate or bullion), if such asset is owned by a foreign entity, a U.S. taxpayer’s interest on the foreign entity is reportable.

Form 8938 requires details of the foreign assets, along with their values.  Form 8938 is required if the total value of all foreign assets exceeds certain predefined threshold amounts, depending on the taxpayer’s residency during the tax year.  In general, reporting is required for assets valued in excess of $50,000 for a single U.S. taxpayer and $100,000 for a married couple filing jointly, living in the U.S.  If the U.S. taxpayer lives abroad, he or she must report any assets in excess of $200,000 for a single taxpayer and $400,000 for a married couple filing jointly.  Financial accounts, and the assets in those accounts, held at a foreign branch of a U.S. financial institution or a U.S. branch of a foreign financial institution are not subject to reporting on Form 8938.

If a taxpayer has reported the foreign assets on another IRS form (e.g., Form 3520 for foreign trusts, Form 5471 for foreign corporations, etc.), he or she need not report these assets on Form 8938,  but must still complete Part IV of Form 8938 and specify on which other tax form the assets were reported.  The amounts reported on the other IRS forms will count towards the aggregate threshold amount for Form 8938.  Therefore, if the amounts reported by the taxpayer on the other IRS forms meet the Form 8938 threshold amount, then any other foreign assets not reported on the other forms must be disclosed on Form 8938.

There are numerous IRS penalties associated with a failure to report foreign assets, as well as potential fines and criminal prosecution.  Taxpayers who own foreign assets and are unsure whether they must file new Form 8938 should seek guidance from an experienced offshore tax compliance attorney.

Additional Important Points

  • The disclosure requirements for Form 8938 are already effective.  While FATCA regulations are coming into effect over time, this new Form 8938 is due this year, i.e., with your 2011 tax return, due April 17, 2012, or later if you receive an extension.
  • Form 8938 is an informational return, whereby ownership interests in foreign assets are reported.  However, Form 8938 does not assess tax on foreign income.  Income from foreign assets is reported on other forms such as Form 1040, Form 8621, etc.  The U.S. Internal Revenue Code assesses income from all sources world wide.  Income includes interest, capital gains, dividends, royalties, etc., from all foreign sources.
  • Any interest in social security, social insurance or other similar foreign government program need not be reported on Form 8938.
    However, an interest in a foreign pension plan or foreign retirement account requires reporting.
  • A mere signatory authority (e.g., power of attorney, co-signatory) over a foreign account does not require disclosure via Form 8938.  However, the FBAR form is still required for a power of attorney or co-signatory authority.
  • Taxpayers filing Form 8938 may still be required to file an FBAR in addition.
  • Form 8938 requires the reporting of the value of foreign assets.  Many cases, e.g., ownership of a fraction of a foreign entity or investment fund, may require complex valuation and obtaining financial information from foreign sources.
  • With respect to beneficiaries of foreign trusts, whereas such beneficiaries are required to file an FBAR if they have a “present” beneficial interest (defined as the right to receive a mandatory distribution, or actual receipt of 50% of trust income or assets), Form 8938 is required if the trust beneficiary receives a distribution that, together with other specified foreign assets, meets the Form 8938 specified threshold (e.g., $50,000 for a single taxpayer; see supra).  If the foreign trust is a discretionary trust and the U.S. taxpayer does not receive a distribution (or receives a distribution that, when combined with his/her other specified foreign assets, does not exceed his/her reporting threshold), the value of his/her interest in the trust is zero and therefore not subject to reporting.
  • For the time being (until the IRS issues additional regulations), Form 8938 reporting requirements apply only to U.S. individuals.  U.S. corporations and other entities are not required to report ownership or interest in foreign assets on Form 8938.  (Note, however, that the FBAR does apply to entities like corporations).
  • Form 8938 applies to various components of offshore asset protection structures (e.g., foreign trusts).  However, the offshore asset protection is still intact, because Form 8938 is for IRS reporting purposes only and does not impact the integrity of a foreign asset protection structure.  This form merely makes an already reportable offshore entity or asset more transparent to the government.  As we have long counseled, foreign asset protection structures do not rely on secrecy and give no expectation of tax secrecy.  However, vis-a-vis private civil creditors, tax complaint offshore strategies still offer concrete asset protection.

Taxpayers who own or have interests in specified foreign financial assets may have to report the existence and value of those assets on new IRS Form 8938, or face penalties.  We have long assisted clients with the many compliance and disclosure requirements for offshore assets.  We can assist in determining whether you are subject to new Form 8938, and can answer any other questions you have regarding U.S. tax compliance for foreign assets.

Asher Rubinstein quoted by Reuters on Gingrich and Romney Tax Returns

Asher Rubinstein quoted by Reuters on Gingrich and Romney Tax Returns
(Reporting By Samuel P. Jacobs; Reporting by Kim Dixon; Editing by Eric Walsh and Philip Barbara)
For original article, please click here

Gingrich releases tax returns during debate

(Reuters) – Republican presidential hopeful Newt Gingrich released his tax returns on Thursday, revealing that he and his wife Callista paid $995,000 on an income of $3.1 million in 2010.

In a move designed to embarrass rival Mitt Romney, who has not made his tax forms public, Gingrich issued his returns during a presidential debate in South Carolina.

The bulk of Gingrich’s income appears to come from Gingrich Holdings, one of the companies run by Gingrich before he ran for president. Of his total income, $2.4 million, apparently largely related to Gingrich Holdings, was likely taxed at the “ordinary income” tax rate of 35 percent.

Gingrich’s return showed relatively small capital gains and dividends holdings, which would be taxed at the 15 percent rate – about what Romney estimated his effective tax rate would be earlier this week.

Altogether, Gingrich paid a tax rate of 31.5 percent in 2010. The campaign said Gingrich and his wife donated $81,000 to charities in 2010.

During Thursday’s debate, Gingrich called on Romney to release his tax returns now while the presidential race was still reasonably early.

“If there’s anything in there that is going to help us lose the election, we should know before the nomination. If there’s nothing in there, why not release it?” Gingrich said.

“I’ll release my returns in April, and probably for other years as well,” Romney, a multimillionaire, said.

The debate moderator asked Romney if he would follow the example of his father George, who released 12 years of tax returns when he campaigned for president in 1968.

“Maybe,” Romney said.

This week, Romney said that he pays a tax rate close to 15 percent, much lower than that of most working Americans, because much of his earnings come from investments.

“I’m not going to apologize for being successful,” Romney said.

Rick Santorum, a former U.S. senator from Pennsylvania who is battling with Gingrich to be the conservative alternative to Romney, said he would release his tax returns, but they were at home on his computer.

Speaking before Gingrich released his returns, New York high net worth attorney Asher Rubinstein said Romney’s 15 percent tax rate was legal and to be expected.

“Newt Gingrich has stated that his tax rate was 31%, in contrast to Romney’s 15 percent. It seems … that Mr. Romney is not only a better investor, he also consulted better tax lawyers,” he said.

Lessons from the Mitt Romney and Newt Gingrich Tax Returns

Lessons from the Mitt Romney and Newt Gingrich Tax Returns
by Asher Rubinstein, Esq.

The tax returns of the Republican presidential candidates have been the subject of many news reports and discussion this week.  In these days of high unemployment and economic uncertainty, Mitt Romney has been demonized by his own party and by Democrats for being wealthy and for running a successful investment fund.  Now, he is being criticized over his taxes.

We wish to point out that our comments are in no way an endorsement of any candidate or any political party.  We strive to write about issues of taxation and law, and we do not take a political stance.  With this in mind, we would like to comment on some of the recent news reports.

1.  Romney “has been paying a far lower percentage in taxes than most Americans, around 15 percent of annual earnings”.

This is because most of his income is investment income, taxable at 15% capital gains rate (after they are first taxed on the corporate level), rather than 30+% income tax rate.  This preferential tax rate encourages investment in corporations, new technologies, real estate, etc. and stimulates the economy.  To increase the capital gains tax rate to income tax levels would discourage investment and cause people to park money in, e.g., bank accounts paying very low interest.

2.  “Bain Capital, the private equity partnership Romney once ran, has set up some 138 secretive offshore funds in the Caymans.”

Hedge funds and private equity funds are regularly established in foreign jurisdictions such as Cayman in order to attract investment from non-US persons (who may be reluctant to invest in the US for reasons including high tax rate, State and Federal regulation, etc.).

Cayman funds are not “secretive”.  They are publicly registered, annually reviewed and are subject to KYC, anti-money laundering regulations.  Moreover, Cayman and the US have signed a Tax Information Exchange (TIE) agreement and a Mutual Legal Assistance Treaty (MLAT).

There is no prohibition on a US person from investing in a Cayman fund.  It is not illegal.  So long as the investment is disclosed to the IRS (on the FBAR form) and foreign income reported and tax paid on that income, there is nothing wrong.

There is no tax advantage for a US person to invest in a Cayman fund.  The investment is reported to the IRS, and will be taxed at the same rate as if it had been a US investment.

Even if there was a tax reason to direct investment to Cayman, people and businesses very often chose their course of action, including major decisions, on the basis of tax minimization through geography.  Hedge funds legally move from New York City to Connecticut to save taxes.  Elderly people move to Florida for reasons other than weather.  Howard Metzenbaum, who spent decades of public service as a U.S. Senator, moved to Florida in his final years because there is no estate tax in Florida.

3.  “Unlike most Americans, Mr. Romney has between $20.7 million and $101.6 million in his IRA.”

Romney’s IRA was funded with shares (or partnership interests) of Bain many years ago, when the share prices (or partnership interests) had a much lower value.  Over time, those shares (interests) grew in value.  That is the purpose of an IRA – the tax-deferred accumulation of gains over time.

When Romney withdraws from the IRA, gains will be taxed at ordinary income tax rates (30+%), rather than capital gains rate (15%), even though the gains are technically capital gains rather than income.

Even if Romney does not withdraw from the IRA, when he is 70.5 years old, the IRS will still tax the funds not withdrawn, at income tax rates.

It seems to us that Mr. Romney availed himself of legal opportunities to pay less in taxes.  We are reminded that lowering one’s taxes is neither illegal nor immoral.  On a basic level, people take either the standard deduction or itemize deductions, depending on the more favorable outcome.  There is nothing sinister in this.

Judge Billings Learned Hand (1872-1961), one of the most important federal judges of the last century, wrote:

“Over and over again, courts have said that there is nothing sinister in arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions.”  (Commissioner of Internal Revenue v. Newman, 159 F.2d 848 (2d Cir. 1947) (dissenting opinion)).

Moreover, Justice George Sutherland (1862-1942) of the United States Supreme Court wrote:

“[T]he legal right of a taxpayer to decrease the amount of… what otherwise would be his taxes, or altogether avoid them, by means which the law permits cannot be avoided.”  (Gregory v. Helvering, 293 U.S. 465 (1935)).

These words establish a clear principal: Tax minimization, through legal means, is not only allowable, it is wise and it is universal.

Newt Gingrich has stated that his tax rate was 31%, in contrast to Romney’s 15%.  It seems to us that Mr. Romney is not only a better investor, he also consulted better tax lawyers.

Will Your Offshore Accounts Land You in Jail

Will Your Offshore Accounts Land You in Jail
: Thursday, 5 Jan 2012 | 1:20 PM ET
By: Linda Sittenfield, CNBC Senior Producer
For the original article, click here

The days of hiding away your assets in a secret Swiss bank account are over. And you don’t have to be a deposed dictator to be worried. U.S. authorities are hunting down wealthy American tax cheats all over the world, using a spate of new tactics aimed at closing the tax gap.

As of September 2011, the IRS had collected nearly $3 billion in taxes, interest and penalties from 30,000 taxpayers. Lurking in the background is serious jail time, as one father and son in Florida know. In March 2011 the two were sentenced to 10 years in prison for concealing $150 million in assets.

Asher Rubinstein, is partner at Rubinstein & Rubinstein, LLP, an international law firm based in New York City that provides specialized legal expertise in asset protection planning. Mr. Rubenstein has clients who have brought their offshore accounts into compliance, as well as clients who are now under investigation for tax fraud.

We had a very elderly gentleman client with a Swiss account that had been in his family for many years. They were Jews from Hungary. The father had put his life savings in a hiding place under the house. After surviving Auschwitz family members went back, recovered the money, and put it in a Swiss account. At the time they had no connection to the U.S. Later, they emigrated to the U.S. The account had grown to $2 million. Our client had no wilful intention of evading taxes. We got the IRS to settle for $20,000.

LS: Where can you hide your money these days ? Is there any secret jurisdiction ?

You can try to hide your money, but will you get away with it ? The sacrosanct Swiss banking secrecy has been shattered. They were happy to take your money whether you were an African dictator, a Nazi, a Jew, it didn’t matter. But not anymore, at least with respect to Americans, but also others.

If you’re looking for a first world democratic stable jurisdiction, there is no such place to hide your money. And now they’re looking for assets flying from Switzerland to Singapore, Panama, and so on. The IRS is using the same tactics worldwide.

Maybe there’s a renegade third world location. But is that a good place to put your million dollars ? In such a place your $1 million could represent the biggest chunk of assets managed by some uncooperative banker. But in such a place there could be political upheaval, or a coup.

LS: What tactics is the IRS using now ?

Tactics include –

TIE – Tax Information Exchange Agreements. Signed with many jurisdictions – Lichtenstein, Andorra, etc. If the U.S. government is investigating a U.S. citizen, the signatory is obligated to assist. It covers criminal and civil tax fraud. This is important because in Switzerland they never recognized civil tax fraud, but that loophole’s been closed.

MLAT – Mutual Legal Assistance Treaties. Similar to TIEs.

John Doe Summons – It’s the DOJ that conducts the investigation. If you can name the person, no problem. A John Doe Summons permits access to a class of people. This happened some years ago with island banks that issued debit cards. The IRS used a John Doe Summons to access the names of the debit card holders. They used it again in 2009 against UBS, which gave up 5000 names. They’re using it now against HSBC in India.

FATCA – Foreign Account Tax Compliance Act. Requires people to report assets in excess of certain thresholds.

Subpoenas – A new tactic used by prosecutors to get people to give up incriminating information. If they don’t comply, they’re charged with contempt. If they do, they’re incriminating themselves. We’ll see how this plays out. Clearly there could be a 5th amendment objection here, but there are exceptions to using the 5th.

How much money is offshore avoiding taxes ?

Some estimates are in the trillions of dollars. Clearly our government needs money. It calls on Treasury to get it, and Treasury looks to the IRS. The tax gap is something like $500 billion. We have a tremendous need for funds. Once the IRS won against UBS, they started utilizing the carrot and stick – come forward before we get your name from a bank and we won’t prosecute you criminally. Now they’re going after the bankers, not just the taxpayers. The U.S. just charged 3 Swiss bankers with conspiracy. And every banker or the IRS prosecutes cuts a deal by offering up other bankers and clients.

Two sons of a British national came to see us. The father was very successful and had accounts in former island tax havens in France and England, like the Isle of Man. The sons inherited everything and emigrated to the U.S. Later, at the urging of UBS bankers, they established a foundation in Lichtenstein. We brought everything into compliance. The UBS bankers who advised them are under indictment now. When bankers are indicted they cooperate and give up names. The IRS doesn’t like this sort of intermediary step. The foundation would have been regarded as an added level of deception. If they hadn’t come forward, these brothers would have faced millions of dollars in losses.

LS: What are the penalties ? How long are the jail terms ?

The basic penalty is 50% of the highest balance in the account, every year. So if you have $1 million in an account for 4 years, the penalty could be $2 million. You could lose the $1 million and still owe millions more. There’s a tax fraud penalty, which can be 75% of the taxes due. And wilful fines could be $100,000 per account per year. Penalties could far exceed the balance, and result in bankruptcy. UBS paid $780 million in 2009 to avoid prosecution.

Jail sentences could be years. Though settlements have included house arrest and probation.

LS: Is there any reason now to keep your money offshore ?

You can keep your money anywhere, but you must pay the tax. There are still good reasons to be offshore – asset protection, diversification of investments, access to foreign investments.

And confidentiality is different from secrecy. Let’s say I’m a doctor who wants to protect assets from malpractice lawsuits. The money can be well protected from private creditors. I have many clients who do this. But they can’t hide from the IRS.

Other reasons to be offshore – you have real estate, you have relatives “back home”, your kid is going to school somewhere overseas. Or maybe you want an account in a foreign bank so you can invest in alternatives, for financial diversification. But the accounts have to be tax compliant.



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