How to Stay on the Right Side of the IRS

By Erika Nolan, Publisher, The Sovereign Society

The right offshore legal structure can offer many benefits: asset protection, financial privacy, tax savings and access to a wider world of investments.

Yet if your structure is not “compliant,” you risk losing these benefits and worse. You could face significant fines from the IRS and, in the extreme, even jail time.

Fortunately, in June, the IRS announced that taxpayers with offshore investments have through Aug. 31 to disclose previously unreported foreign account holdings. This means Americans have an opportunity to participate in a new “voluntary disclosure initiative” in order to get current on their tax returns without risking jail time.

The IRS has such specific reporting requirements for offshore investments and if you don’t know which forms you’re responsible for submitting you risk making an innocent mistake. Here’s a checklist so your offshore structure is helping you build and protect your wealth and not putting you in legal jeopardy.

Five Steps to Make Sure Your
Offshore Structure is in Good Standing
The truth is, it’s all too easy to run afoul of the U.S. taxman by under-reporting and misfiling the proper returns. So a key principle to keep in mind is that if you should suspect your offshore structure may not be compliant, take quick action to correct any mistakes before the IRS comes a knocking.

Here’s a quick checklist to help you do that...

1. Have Your Offshore Structures Reviewed Annually

Put as much emphasis on your annual financial review as you would for your annual physical.

Prevention is key. Don’t get caught in a bad spot because the tax code has changed - impacting your offshore structures - while you are left in the dark. And don’t assume that a non-U.S. professional will remember which U.S. IRS forms must be submitted. It is up to you to ensure that the taxman gets everything on time and accurately filed.

2. Work with an International Tax Attorney - Not a CPA or Accountant

If you have any concerns about reporting requirements, work with someone who specializes in international structures and tax reporting.

Make certain your offshore structure is 100% compliant. It’s never a good feeling to realize you’ve run afoul of the taxman. But the fate of your finances is in your hands. Rather than run the risk of increased penalties or the threat of an IRS shakedown - be proactive. Chances are, your structures are in good standing. But it pays to know for sure. Obtain the expertise of a licensed professional as well as the time honored principle of attorney-client privilege.

3. If You Discover Under-Reported Income - Seek Criminal Tax Counsel Immediately

U.S. citizens and U.S. resident aliens are required to report their world-wide income annually. If your international tax consultant believes you have inadvertently violated IRS reporting requirements, seek criminal tax counsel as soon as possible.

Under no circumstances should you, yourself, go to the IRS directly to resolve your situation!

Criminal tax attorneys understand the necessary process to resolve most reporting mistakes. Their job is to represent you before the IRS and to work quickly and efficiently to ensure that your structure is fully compliant.

If you can prove reasonable cause and/or the absence of willful neglect for your failure to file the returns, you may be able to avoid penalties.

In a best-case scenario, all you’d be liable for is back taxes plus interest. (Keep in mind, income must be reported in the year it was earned.)

4. Have Your Legal Counsel Hire an Accountant

By allowing your legal counsel to hire a CPA - you will greatly streamline the reporting process. In most situations, you will be required to provide documentation for up to three years (or as much as six years if you have made any mistakes that could be construed as tax fraud).

For example, say you established an offshore trust in 2003. You believed that your offshore trustee was filing the IRS Form 3520A each year. Yet four years later, during a routine conversation, you discover (much to your surprise) that they never filed the form. In order to correct this mistake you would need to go back to the 2003 tax year and file all the necessary documents from that point forward.

Keep in mind that failure to file the form 3520A or 3520 could lead the IRS to assess a 35% penalty against the value of your trust assets.

5. Don’t Liquidate an Offshore Structure Until You Take Care of Delinquent Tax Forms and Penalties

Disbanding an offshore structure will not help you avoid trouble. If the IRS discovers that you’ve closed a non-compliant structure without first getting it compliant, they could bring criminal charges against you.

But there is a silver lining ...

The government wants to encourage voluntary tax compliance. So even though the IRS has the right to file criminal charges against anyone who is non-compliant, you can minimize this threat by initiating contact with the agency.

And remember, you are facing an important deadline: Aug. 31, 2011 if you or a loved one needs to apply for amnesty.

In Wealth & Prosperity,


Erika Nolan
Publisher, Sovereign Society