Tax Planning

Don’t Poke a Sleeping Bear

As a child growing up in West Virginia, I came to know a lot about bears – particular the black bears that are natural to that part of the country.

As a Boy Scout on one of our numerous winter camping outings, I was reminded that our furry friends don’t like to be woken up during hibernation.

There’s a good reason for this, too. I’ll spare you the gory details, but even those who haven’t spent much time in the forest know the importance of not “poking the sleeping bear.”

The same is true of offshore tax planning. But in this case, the bear is not a 500lb animal of the forest; it’s the 100,000+ strong army of tax professionals that make up the IRS.

Unfortunately, some people like to learn their own lessons, so, if you insist on provoking the IRS, here’s a great way to do so.

Just claim your IRA as taxable

I was exchanging e-mails with an offshore bank last week, trying to help a client open an account at the bank through her IRA. And, the bank wasn’t making it easy. It told me that my client had to file two IRS reporting forms annually for his IRA:

  • Form TD F 90-22.1, the “foreign bank account report,” or FBAR form
  • Form 8938, the “Statement of Specified Foreign Financial Assets”

Only, it’s not true. IRAs don’t need to file either form.

Not only that, but the bank also insisted my client complete the application in such a way to indicate that the retirement account was subject to US tax.

Uh-oh. Making a tax-deferred account look like it’s taxable is generally not a good idea – especially given the fact that in just a few months, FACTA will require all offshore banks and other “foreign financial institutions” to send their client data to the IRS in one way or another.

Put yourself in the shoes of an IRS agent

It might be hard, but try to visualize yourself as a dedicated revenue agent – if only for a moment. You have in front of you a tax return from a US taxpayer who acknowledges holding foreign accounts. The taxpayer even filed the right forms showing income from the account. Only, his tax return shows no record of that income and, worse, no tax payment on the income.

Wouldn’t you be a little suspicious? Wouldn’t you send a letter to the taxpayer demanding back taxes, interest, and penalties?

You bet you would, and for those who get caught in this trap, it’s going to take some work to sort it all out.

They will have unwittingly poked the bear and got a mauling in return.

Three lessons

To ensure you never get caught in such a situation, follow these simple guidelines.

#1: Be sure that whatever bank you use understands how to properly do what you want. Get qualified referrals from trusted advisors who have the experience to be able to judge the good ones from the bad.

#2: Before you start throwing paperwork around, be sure that what you’re doing is correct. Thanks to our constantly changing Byzantine tax regulations, quite a few non-US banks and financial companies unwittingly lead their clients into traps that get them in trouble with the IRS.

#3: When in doubt – even if just a little doubt – get an expert to confirm first.

Believe me, the pain saved by putting up a couple bucks is well worth it.

Just ask anyone who’s been scratched, mauled, and/or crushed by the IRS before.

Mark Nestmann

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