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Example of the Tax Dabble Trap | Rochester MN International Tax Lawyer

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Some years ago a Client (he was not a client at that time) inherited a Foreign Corporation. It was a mid-sized Foreign Corporation, and he was not the only owner there, but a partial owner, a minority owner.

In a Foreign country, the classification of ‘Entity’ may not be exactly in line with the US Tax Classification. So to figure out whether this is a Corporation or a Partnership, you really have to look into how this company operates and what the law says (in) how it operates.

He came to a Business Lawyer and actually there was an Accountant involved in this case as well. (We’ll talk about the next trap after that and why the Accountant may not have been the best choice there). An Accountant was involved there but the chief role was played by the Business Lawyer. The Business Lawyer was involved some years before in another Transaction. In that transaction, he was advised by the Accountant that the Form 5471 had to be filed and about the penalties associated with the form.

He told the Client, “We don’t know what kind of Entity this is and I know about this Form 5471 and based on what the Accountant told me, I don’t think your Entity is actually a Corporation; I think it’s a Partnership. You are a minority owner; that means that Form 8865 doesn’t apply and you don’t have the 5471 form requirement. That will be an easier way to get rid of the IRS Penalties associated with Form 5471.”

What he forgot about… well, two things is – one little detail about income. If it’s a Partnership, it’s a Pass Through Entity. That means that this Client was in Income Tax Non-Compliance since the time he inherited the Company. For this Client, that would mean that he was underreporting about 90% of his income in each year.

The second issue, is obviously the one I have already mentioned. You have to look at what the law says, what the Local Law says. How did the Company operate before? You cannot just randomly say: this a Foreign Partnership and this is a Foreign Corporation just because some of the details are here or some of the details are not here.

In the end, we were able to go back. It was a Corporation, not a Partnership so we were able to file a 5471 Voluntary Disclosure and were able to end that issue without any penalties. But if the IRS had audited his tax returns and discovered that he underreported his income by 90%, tremendous penalties would have ensued.

International Tax Lawyers San Diego | Tax Law Uniformity Trap

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The Tax Dabble Trap sort of flows into the next trap; the Tax Law Uniformity Trap. In the same way the Business Lawyer believes he may be competent enough to advise on International Tax Law, he might think that there is no difference between US International Tax Law and US Domestic Law. For that person, that Lawyer, there’s only Tax Law and this is not correct.

This is exactly what the Tax Law Uniformity Trap is: the assumption that US Domestic Law and US International Tax Law are the same and this is false.

Let me give you sort of an analogy; think about pies. If you were to look at the US Domestic Tax Law, that’s your baked dough, that bottom part of the pie and International Tax Law is a big level of thick rich cream on top of that pie. There is a deep inter-relationship between the two. International Tax Law is obviously part of the overall US Tax Law but International Tax Law is different, it has a different structure, different texture, different taste if you wanted to continue this analogy.

It’s important to remember that Tax Consequences on the International level may not be the same as Tax Consequences on the US level.

International Tax Lawyers Des Moines | Special Treatment of Foreign Owners of a US Corporation

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There’s also a belief that a Foreign Client who owns a US Corporation is in the same position as a US Client who owns a Domestic Corporation, which is also false.

I think everyone probably knows here that an S Corporation cannot be owned by a foreign person.

There’s also such an interesting form called a Form 5472, just to give you an example, which requires the Domestic Corporation to report certain transactions between the corporation and the 25% or more foreign owner(s) of that corporation and there’s a $10,000 penalty associated with the form for not filing it and which can go up to $50,000.

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.