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International Tax Attorney New York | Why an International Tax Lawyer is Superior to An Accountant

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Let’s say that the Business Lawyer understands that he shouldn’t be advising on International Tax Law issues himself; let’s say that he understands that he shouldn’t be dabbling in International Tax Law. Let’s say that he understands this: the difference between US Domestic Law and US International Tax Law.

Then the next question is: Did he choose the right advisor? Now we’re getting into the fourth: the tax professionals equality trap which is basically an assumption that ‘all US Tax Practitioners are equally competent to advise on US International Tax Laws’.

Remember that pie that I described about the difference between them? Let’s put it this way: In the US, the great majority, more than 95% of US Tax Accountants never get out of the baked crust. They don’t know about the thick huge level of cream on top of that pie which is called US International Tax Law; they don’t know about it. So, one of the biggest problems that I’ve seen is when Business Lawyers bring in US Accountants into advising on something like this.

I can tell you that 90% of my cases, of my Offshore Voluntary Disclosure cases come after an Accountant already advised on that case; 90%, that’s a horrific percentage. The clients were trying to do what they were thinking they should be doing.

But it’s that the Accounting Profession operates in a different way; the Accounting Profession operates in a different model. You have to really get to the top of the top of the Accounting Profession before you start getting Accountants who know about this, about US International Tax Law. If you think about it, how do Accountants make their money? By adopting an individualized customized approach to tax returns? No; by turning out as many tax returns as possible within the given time, because they have to standardize, otherwise they won’t get out as many tax returns and their profits will go down.

Lawyers operate in a different way. We charge hourly; so, for us customization, specialization, individualization of the case- that’s very important. We look at each individual and each company and look at that specific set of circumstances and we analyze that set of circumstances. We think about what could happen to that client; what are the requirements that may apply to him? How can we avoid the penalties? How can we structure that particular transaction better?

I can tell you, unfortunately that’s not the case for most of the Accountants, even if they think they are doing that.

International Tax Lawyers Grand Rapids | Why Accountants Should Not Advise on International Tax Law

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The first example consists of a case I was not really involved in but I was brought in to consult on that case. But I really like it as an illustration of what happens when Business Lawyers fall into the Tax Professionals Equality Trap.

In that case there was a Chinese individual who came to a Business Lawyer, a Business slash Immigration Lawyer and they were starting a business in the United States and as a way for the Chinese individual to obtain his green card eventually. What happened there was they brought in an Accountant; an Accountant who the Lawyer knew for about twenty years. So, the Tax Accountant looks at this and says, “Okay, fine.” The Accountant knew about the FBARs at least. FBARs are the report of each Foreign Bank and Financial Account.

The Accountant said, “Well, he has to file the FBARs. But for these Companies, there’s nothing in particular; these are just Foreign Companies, what do we really care? For US Tax Purposes all we really need to disclose… ‘did you hear about the form 8938?’ is that they own and the company and that’s it.”

The reason why a lot more Accountants know about Form 8938 right now is because it is part of the Tax Return first of all, but second, that there has been much more awareness about this form and the Accountants have received some training on it.

So, I was invited to… something triggered my invitation, let’s put it this way, into that situation. By this time, they had already filed the Tax Returns for two years and this guy owned one company, which owned ten other companies, which owned God knows how many subsidiaries. The amount of Forms 5471….. and not Forms 8938 because 8938 only applies where Forms 5471 do not have to be filed; so the Accountant was wrong on that issue as well. On top of that there are all kinds of complex rules. A lot of these were Controlled Foreign Corporations and the Subpart F rules kicked in and it was absolutely a huge mess.

What went wrong here? What went wrong obviously was that a wrong Tax Advisor was brought in this case.

International Tax Lawyers Boston | You Need an International Tax Attorney for US International Tax Law

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Let me give you another example and this comes in the Voluntary Disclosure context. This time the client was a Canadian Citizen and a Permanent Resident of the United States. He received a Foreign Inheritance; and when I say a Foreign Inheritance, I mean non-Canadian and non-US.

The question really was: Where should he declare himself a Tax Resident? In the United States or …. and I apologize the year in which the inheritance occurred, he was not yet a Permanent Resident; he was just here in the United States. He satisfied the Substantial Presence Test but he was not a US Permanent Resident at that point. So the question was: Where should he be a Tax Resident, in Canada or should he be a Tax Resident in the United States?

He came to a Business Lawyer in New York. The Business Lawyer actually brought in an Accountant from a very large firm. And what they did is they said, ‘Okay’. It’s very interesting because it shows you to some degree the way that a lot of Accountants are thinking. Their primary goal was to avoid US Tax Liability so they declared my client as a Non-Resident of the United States and as a Canadian Resident avoiding all of the taxes which were associated with the income from that Foreign Inheritance.

The problem was that there were sufficient Foreign Tax Credits first of all to offset most of that tax liability; there was some but not much. But in Canada, Foreign Inheritance is actually taxed unlike in the United States where it would have to be only declared, in Canada it would have to be taxed.

Because they were late, they were facing penalties. So they had a Canadian Attorney negotiating some sort of a settlement with Canadian Authorities for (anonymously) five or six years. (My client was only part of that larger family that received that Inheritance).

By thinking very narrowly about only US Tax Liabilities, they exposed the client to a much larger Foreign Tax Liability. In the end, he declared himself a US Tax Resident; we did a Voluntary Disclosure on the Income. He paid some taxes but he paid a set of penalties in Canada and didn’t pay a set of taxes on his Foreign Inheritance in the United States because there is no Foreign Inheritance tax in the United States.

That shows you that you really need, when it comes to International Tax issues, you really need an International Tax Attorney if you want to approach that problem correctly and properly.

International Tax Lawyers Seattle | Foreign Exceptionalism Trap

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The Foreign Exceptionalism Trap: This is a belief that certain business transactions or events that occur completely outside of the United States do not have any US Tax Consequences for US Persons involved in these transactions.

This is probably one of the most dangerous traps. One of the most common and one of the most dangerous.

It’s very dangerous because it’s completely false. If a US Person is involved in a transaction, there will be US Tax Consequences no matter where the transaction takes place. I want to repeat that: no matter where a transaction takes place there will be US Tax Consequences.

It might be in the form of tax; it might be in the form of the tax reporting but there will be US Tax Consequences. This trap usually occurs when there is a complete and full reliance on Foreign Accountants and Foreign Tax Advisors in general.

It’s usually associated, obviously with the failure to coordinate this entire transaction with a US International Tax Attorney.

Foreign Trust Lawyer St Paul Minnesota | Example of the Linguistic Uniformity Trap

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I want to share with you an example from my practice: a case which has to do more with Foreign Trusts rather than anything else but it can be equally applicable to a Corporate situation.

My client was a beneficiary of a Foreign Trust (actually several, but that doesn’t really matter because the one we are talking about here is the one where the problem appeared) and that trust in the language, the actual Trust Agreement… let me go back a little bit; the trust was formed in the United Kingdom so all the documents were in English. I received the Trust Agreement from the Trustee and I reviewed the Trust Agreement and in the Trust Agreement, it says that my client is entitled to ‘all income’; so, income has to be distributed every year.

If income has to be distributed every year for US Tax Purposes, it’s a Simple Trust as apposed to a Complex Trust where a client would be entitled to only a partial income or no income and whether the Trustee has a discretion in distributing that income.

In the UK, those Complex Trusts are known as Discretionary Trusts. At first when I looked at it I thought: ‘Okay, income, income, income distribution. Income is income right?’ But then for some reason I started wondering: ‘Income, is it really Income? What does it mean by Income?’ My experience has taught me to doubt everything and I was right to do that because in the United States ‘income’ means all income: Capital Gains and Ordinary Income, Dividends, whatever – all of that is income.

In the United Kingdom, ‘income’ means really Ordinary Income. Capital Gains is a completely different category. So, in reality my initial conclusion that this trust was a Simple Trust was erroneous.

You ask: Why do we care if it’s a Simple Trust or a Complex Trust? The problem is if it’s a Simple Trust then all of the income including Capital Gains are deemed to be Distributed to the client and the client has to pay taxes on that income on his tax return; whereas, if it’s a Complex Trust then we only count the income to which he is entitled as being distributed. So that ordinary income, in that case was Rental Income to the client and the Capital Gains were kept off the tax returns.

So this is a very good illustration of the Linguistic Uniformity Trap: Doubt Everything!