The FBAR Side: IRS Ruling an Obstacle for Would-Be U.S. Investors

Despite the long-standing understanding that "if you own it, control it, or benefit from anything anywhere, you must tell the IRS", last week's IRS comments suggest that the plot has thickened substantially for offshore investors…especially those with an eye on U.S. residency.

In the world of offshore banking, there are technically a wide number of justifications for nationals of a given country to park their assets in a tax haven.  Despite this, the real reason comes down to asset protection…from income taxes, from estate taxes, from litigation, etc.

Last week, the IRS issued an opinion which formalizes the need for hedge-fund and private equity investors to disclose EVERYTHING they have offshore. The new position is consistent with the other stuff unfolding in Obama's Washington: the Securities and Exchange Commission (SEC) and Congress are proposing that
hedge fund managers register with the agency, and the administration
is proposing to end a tax break on compensation for private-equity

While the latter two developments do not present immediate concern to private investors (who don't care whether or not their brokers are SEC-registered), the move does represents a departure in policy if not in regulatory language: while the IRS maintains that this requirement has ALWAYS been so (and the letter of the law supports that position to a certain extent by its amplitude), U.S. tax lawyers and fund managers are, well, panicking.  Why?  Because failure to communicate this requirement to high-net-worth clients (in a sort of fiscal "don't ask, don't tell" parallel) means malpractice…and communication of it could mean the loss of a lot of would-be U.S.-resident investments and the lucrative commissions that come with them.

The action by the IRS is no doubt related to the ongoing investigation of a number of UBS AG clients, who the IRS believes have been failing to report income from taxable assets offshore.  It's as if someone in Washington just figured out that people are putting money offshore to avoid taxes…imagine THAT!

What to do, what to do…well, very simple really: if you are already a U.S. tax resident, then you need to select your offshore structures and activities very carefully in order to comply with this development.  In other words, conduct a comprehensive offshore investment self-audit, be prepared to pay some taxes, and sleep well at night.  But if you are one of the many interested in opening a business in the U.S., the new ruling has profound implications: what may comply with your country's tax laws will NOT matter once you become a tax resident of the U.S…potentially exposing whatever you've parked offshore and making it taxable.

In the wake of Madoff, this kind of response to potential losses in the investment world is to be expected, I suppose.   But in reality, this latest clarification – which is what it really is when you chase down the regulatory language — does not in any way impact how well-managed U.S.-origin investments offshore will be handled.  The creative combination of offshore tools ranging from trusts to insurance products available high net worth individuals interested in the benefits of tax haven investments.

I'm proud to be working with what I believe to be the very best team of international financial advisors, insurance representatives, and tax professionals in the country.  Email me if you want to make sure your offshore ducks are in a row.