Form 8938: Another Nail in the Coffin of Offshore Financial Privacy [Part II]

Form 8938: Another Nail in the Coffin of Offshore Financial Privacy [Part II]

By Mark Nestmann • January 13, 2012

In my last blog entry , I discussed the newest U.S. government escalation in the War Against Financial Privacy: Form 8938, the “Statement of Specified Foreign Financial Assets.”

As I described, the extremely detailed information this form demands strips what little privacy remains from nearly all offshore investments.  What's more, the filing requirement for Form 8938 is in addition to a completely separate mandate to acknowledge many types on offshore investments on Treasury Form TD F 90-22, the "Foreign Bank Account Reporting" form, or FBAR.

Form 8938 vs. the FBAR

The thresholds, assets covered, filing deadlines, filing requirements, and filing addresses are also different for Form 8938 than for the FBAR. Here's a summary:

  • Lower threshold. You must file the FBAR to report a financial interest in, signature authority, or other authority over one or more financial accounts in foreign countries" if the aggregate value of the account(s) exceeds US$10,000 at any time during the year.
  • Assets covered. There is substantial duplication over the assets that must be reported respectively on Form 8938 and the FBAR. However, there are some exceptions. For instance, you must report many types of foreign holdings of physical gold on the FBAR. You don't need to report physical gold holdings on Form 8938 unless they are held in a "financial account." On the other hand, there is no requirement to report interests in foreign entities on the FBAR, as there is on Form 8938.
  • Filing deadlines. You must file the FBAR separately with a non-extendible deadline of June 30 for the previous year. The Treasury must receive the form by that date. In contrast, you must file Form 8938 with your tax return by April 15 for the previous tax year (June 15 if you live abroad). This deadline can be extended until October 15 if you file a request for extension to file. Since April 15, 2012 is on a Sunday, the deadline for filing your 2011 tax return is April 17. The IRS need not receive your return by April 17, but it must be postmarked or otherwise sent by that date.
  • Filing requirements. For the moment, only individual taxpayers, or individual taxpayers filing joint tax returns with their spouses, must file Form 8938. In contrast, numerous types of domestic and foreign entities must file the FBAR.  In addition, if your income is below the IRS filing threshold for 2011, you don't need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold. However, you must file the FBAR if your offshore holdings meet the $10,000 threshold regardless of your income.
  • Filing addresses. The FBAR must be filed with a Treasury office in Detroit, Mich. Your tax return is filed at whatever IRS center that services your state, or to the IRS international service center in Austin, Texas if you live abroad.

What Remains Non-Reportable?

The most obvious non-reportable offshore asset for both the FBAR and Form 8938 is foreign real estate you own in your own name. This investment clearly isn't a financial asset or an account.

Similarly, property associated with that real estate—art hanging on the wall, gold coins kept in a safe on the premises, etc., wouldn't be reportable. However, if you hold foreign real estate through a foreign entity (e.g., a foreign corporation or LLC), you lose some of your offshore privacy. The foreign entity has separate filing requirements and must at minimum submit an annual income statement and balance sheet to the IRS. In addition, it's not clear if you must report foreign real estate holding structures like cooperatives or similar contractual holdings on Form 8938.

Certain types of assets you hold in a box at an offshore private vault to which only you have access may also to be non-reportable. For instance, gold and silver coins kept in such an arrangement don't appear to be reportable on either form.

Other ambiguities remain. For instance, it's fairly clear that you must report offshore holdings of physical gold offshore to which you don't have exclusive access on the FBAR. Gold in an offshore bonded warehouse is an example. However, the rules don't address holdings of silver, platinum, or palladium and make no distinction between unallocated or allocated holdings.

The Real Purpose of the Offshore Reporting Requirements

The mainstream media parrots the claim that the purpose of the expansion in offshore reporting requirements is to crack down on massive offshore tax evasion. Numerous sources have repeated the preposterous claim by Sen. Carl Levin (D.-Mich.) that offshore tax evasion costs the U.S. Treasury more than $100 billion annually. Even the conservative Washington Times repeated it without questioning its authenticity.

Call me a skeptic, but I don't think offshore tax evasion has anything to do with these requirements. Instead, I think these confusing, duplicative, and draconian requirements have three other purposes that are considerably more sinister:

  1.  Discourage U.S. citizens and residents from investing outside the United States. After all, if you invest internationally, you MUST be a criminal, correct? That's the message you're supposed to believe, and these reporting requirements make it crystal clear that offshore investment is evil. Of course, you shouldn't believe any of this tripe. Diversifying your wealth outside your own country is the single most important step you can take to insure long-term financial security for yourself and your family.
  2.  Pave the way for foreign exchange (FX) controls. These are laws restricting private ownership of, or transactions in, foreign currencies and gold. Residents of China, Cuba, Malaysia, Myanmar, Venezuela, Zimbabwe, and many other countries have long dealt with these restrictions. If you live in a country that imposes FX controls, you may be required to exchange your holdings in "hard" currencies or gold for holdings in the national currency. This makes it impossible for you to protect yourself from any future decline in the international value of that currency, or from inflation at home. However, FX controls are much more difficult to enforce internationally than at home. Hence, the need to require "full disclosure" of offshore holdings to enforce any future FX control regime.
  3.  Pave the way for a wealth tax. The mechanics of a wealth tax couldn’t be simpler. You prepare a balance sheet of your worldwide assets. Then, you subtract an exempted amount. You pay a small tax—generally 1% or less—on the balance. Governments love wealth taxes because they force citizens to declare everything they own. Indeed, with a wealth tax, you'll need to declare the value of those gold coins buried in your basement, the cash under the mattress, and of course, previously non-reportable offshore investments. Of course, a wealth tax is in addition to all the other taxes you pay. In this era of artificially manipulated low interest rates. a wealth tax can eat up much if not all of whatever return you're receiving on your investments.

If you're a U.S. citizen or resident, the only way to avoid the offshore fear-mongering and potential for FX controls and a wealth tax is the admittedly radical step of expatriation.  This means acquiring a second nationality and passport, if you don't already have one, and then subsequently giving up U.S. residence. If you're a U.S. citizen, you then need to give up your U.S. citizenship and passport.

Expatriation is the only way that a U.S. citizen or long term resident can legally eliminate their obligation to pay U.S. income, estate, gift, and capital gains taxes.  To learn more about expatriation, and the potentially huge payoff in tax savings, check out my "Billionaire's Loophole" report here.

We can help with every step of expatriation, from acquiring a second passport to helping you book your appointment at a suitable consulate to expatriate. Contact us today for a consultation.

Copyright © 2012 by Mark Nestmann

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About The Author

Since 1990, Mark Nestmann has helped thousands of clients seeking wealth preservation and international tax planning solutions. He is the author of highly acclaimed Lifeboat Strategy and other books & reports dealing with these subjects.

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