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Why You Should Not Dabble in International Tax Law | International Tax Lawyers Chicago

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Let’s go to the next one: the Tax Dabble Trap. This is basically a belief that the Business Lawyer can advise on some or any International Tax issues related to Business Transactions even though he’s not a practicing Tax Attorney.

Oftentimes this belief, comes from prior experience. Meaning a Business Lawyer perhaps was involved ten years ago in a similar deal and an Accountant was present and the Accountant advised on this as the Business Lawyer recalls that situation. He may think, “This is a similar deal; why do I need an Accountant? Why do I need an Attorney? I can do it myself.” He then starts advising on Tax Issues believing that his advice is exactly the same as it was ten years ago.

Perhaps the contributing factor to this belief is a bit of hubris which is present in all attorneys, myself included. If you remember the song, “Anything you can do, I can do better. I can do anything better than you.” It’s exactly that kind of attitude; it’s exactly that kind of attitude which is completely false in International Tax Law.

You cannot dabble in International Tax Law for two reasons. First, it’s extremely complex. You may think that this advice was given to you ten years ago by an Accountant or even a Tax Attorney is correct but perhaps there were some details, something in the facts of that particular case that influenced that advice. In a different situation, which might be very similar but yet slightly different and that slight difference might make a world of difference in terms of what kind of advice should be given.

The second reason is that this is a tremendously dynamic area of Law. International Tax Law changes all the time. Today, you don’t have to report this asset; tomorrow there are three reporting requirements. Yesterday, it was not taxed; today it is taxed. Yesterday it was entitled to a Long-Term Capital Gains treatment. Today it’s not or vice versa.

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.