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Importance of Pre-Immigration Tax Planning

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Pre-immigration tax planning is done by very few of the millions of immigrants who come to the United States. This is highly unfortunate because US tax laws are highly complex and it is very easy to get into trouble. The legal and emotional costs of bringing your tax affairs back into US tax compliance (after you violated any of these complex laws) are usually a lot higher than those of the pre-immigration tax planning. In this writing, I would like to discuss the concept and process of pre-immigration tax planning for persons who wish to immigrate and/or work in the United States.

The concept of pre-immigration tax planning is far more complex than what people generally believe. Most people simply focus on the actions required by local tax laws of their home country; very little attention is actually paid to the tax laws of the future host country – the United States. Perhaps, the only exception to this rule is avoidance of double-taxation; however, even this concept is approached narrowly to avoid only the taxation of US-source income by the home country.

Yet, the pre-immigration tax planning should focus on both, US tax laws and the laws of the home country. It is even safe to argue that a much larger effort should be going into US tax planning due to the much farther reach and the higher level of complexity of the US tax system; in fact, the capacity of US tax laws to invade one’s life is not something for which the new US immigrants are likely to be prepared. Furthermore, once a person emigrates to the United States, he will likely lose his tax residency in his home country.

Once the correct focus on US tax laws is adopted, the pre-immigration tax planning process should begin by securing a consultation with an international tax lawyer in the United States. Beware of using local tax lawyers who are not licensed in the United States to do your pre-immigration tax planning – having an idea of US tax laws is not the same as practicing US tax law. A separate article can be written on how to find and secure the right international tax lawyer, but, if you are reading this article, you already know that you should call Sherayzen Law Office for help with your pre-immigration tax planning!

During the consultation, your international tax lawyer should carefully go over your existing asset structure, their acquisition history, any built-up appreciation and other relevant matters. Then, he should classify the assets according to their likely US tax treatment and identify the problematic assets or assets which need further research. The lawyer should also discuss with you some of the most common US tax compliance requirements.

After the initial consultation, your US international tax lawyer will engage in preliminary pre-immigration tax planning, creating the first draft of your plan solely from US tax perspective.

Then, he will contact a tax professional in your home country (preferably a tax professional that you supply and who is familiar with your asset structure). If you have assets in multiple jurisdictions, the US lawyer should also contact tax attorneys in these jurisdictions in order to find out the tax consequences of his plan in these jurisdictions. He will then modify his plan based on these discussions to create the second draft of your pre-immigration tax plan.

The next step of your pre-immigration tax planning should be the discussion of the relevant details of the modified plan with your immigration lawyer in order to make sure that the plan does not interfere with your immigration goals. Once the immigration lawyer’s approval is secured, you can proceed with the implementation of the tax plan.

Obviously, this discussion of your pre-immigration tax planning is somewhat simplified in some aspects and overly structured in others. Not all of the steps need to be always followed, especially followed in the same order; a lot will depend on your asset structure and how complex or simple it is.

Finally, it is important to emphasize that pre-immigration tax planning applies not only to persons who wish to obtain US permanent residence, but also to persons who just wish to work (either as employees, contractors or business owners) in the United States, because these persons are likely to become US tax residents even if they never become US permanent residents.

Contact Sherayzen Law Office for Experienced Help With Your Pre-Immigration Tax Planning

If you are thinking of immigrating to or working in the United States, contact a leading international tax law firm in this field, Sherayzen Law Office, for professional tax help. Our experienced legal team has helped foreign individuals and families around the world and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Société Générale Private Banking Non-Prosecution Agreement

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On June 9, 2015, the Department of Justice announced that Société Générale Private Banking (Suisse) SA has reached a resolution under the DOJ’s Swiss Bank Program.

According to the terms of the non-prosecution agreement, Société Générale Private Banking agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute these banks for tax-related criminal offenses.

Société Générale Private Banking has had a presence in Switzerland since 1926, and had a U.S.-licensed representative office in Miami from the early 1990s until it closed on August 26, 2013. Société Générale Private Banking opened and maintained accounts for accountholders who had U.S. tax reporting obligations, and was aware that U.S. taxpayers had a legal duty to report to the Internal Revenue Service (IRS) and pay taxes on all of their income, including income earned in Société Générale Private Banking accounts. Société Générale Private Banking knew that it was likely that certain U.S. taxpayers who maintained accounts at the bank were not complying with their U.S. income tax obligations.

Société Générale Private Banking’s U.S. cross-border banking business aided and assisted some U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income the clients held in their accounts from the IRS. SGBP-Suisse used a variety of means to assist U.S. clients in hiding their assets and income, including opening and maintaining accounts for U.S. taxpayers in the name of non-U.S. entities, including sham entities, thereby assisting such U.S. taxpayers in concealing their beneficial ownership of the accounts. Such entities included Panama and British Virgin Island corporations, as well as Liechtenstein foundations. In two instances, an Société Générale Private Banking employee acted as a director of entities that had U.S. taxpayers as beneficial owners. In another instance, upon the death of the beneficial owner of an entity, the heirs opened accounts held by sham entities at Société Générale Private Banking to receive their shares of the assets from the entity account.

Société Générale Private Banking further provided numbered accounts, allowing the accountholder to replace his or her identity with a code name or number on documents sent to the client, and held statements and other mail at its offices in Switzerland, rather than sending them to the U.S. taxpayers in the United States. In addition to these services, Société Générale Private Banking:

Processed requests from U.S. taxpayers for cash or gold withdrawals so as not to trigger any transaction reporting requirements;

Processed requests from U.S. taxpayers to transfer funds from U.S.-related accounts at Société Générale Private Banking to accounts at subsidiaries in Lugano, Switzerland, and the Bahamas;

Opened accounts for U.S. taxpayers who had left UBS when the department was investigating that bank;

Processed requests from U.S. taxpayers to transfer assets from accounts being closed to other Société Générale Private Banking accounts held by non-U.S. relatives and/or friends; and

Followed instructions from U.S. beneficial owners to transfer assets to corprate and individual accounts at other banks in Switzerland, Hong Kong, Israel, Lebanon, Liechtenstein and Cyprus.

Throughout its participation in the Swiss Bank Program, Société Générale Private Banking committed to full cooperation with the U.S. government. For example, Société Générale Private Banking described in detail the structure of its U.S. cross-border business, including providing a list of the names and functions of individuals who structured, operated or supervised the cross-border business at Société Générale Private Banking; a summary of U.S.-related accounts by assets under management; written narrative summaries of 98 U.S.-related accounts; and the circumstances surrounding the closure of relevant accounts holding cash or gold. Société Générale Private Banking also provided information to make treaty requests to the Swiss competent authority for U.S. client account records.

Since August 1, 2008, Société Générale Private Banking held and managed approximately 375 U.S.-related accounts, which included both declared and undeclared accounts, with a peak of assets under management of approximately $660 million. Société Générale Private Banking will pay a penalty of $17.807 million.

US taxpayers who have not yet disclosed their Société Générale Private Banking accounts, but who wish to participate in the 2014 OVDP, are likely to face now a 50% OVDP penalty rate.

Abusive Tax Shelters on the IRS “Dirty Dozen” List of 2015

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On February 3, 2015, the IRS said using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them,” said IRS Commissioner John Koskinen. “The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Abusive tax shelters are classified as illegal scams and can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Abusive Tax Shelters

Abusive tax shelters have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax shelters. CI’s primary focus is on the identification and investigation of the promoters of the abusive tax shelters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax shelters, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax shelters.

What are these abusive tax shelters? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These abusive tax shelters are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The abusive tax shelters are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement may be classified as abusive tax shelter. Another thing to remember is that the promoters of abusive tax shelters often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Abusive Tax Shelters: Misuse of Trusts

Trusts also commonly show up in abusive tax shelters. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Abusive Tax Shelters: Captive Insurance

Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. Tax law allows businesses to create “captive” insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive tax shelters, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities oftentimes poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” while maintaining their economical commercial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision. Underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient. The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.

IRS 2014 Final and Proposed Regulations Regarding Form 5472

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In 2014, the IRS issued both final (T.D. 9667), and proposed (REG-114942-14) regulations amending the rules for filing Form 5472, (“Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”). Form 5472 is used to provide the information required under Internal Revenue Code (“IRC”) Sections 6038A and 6038C when reportable transactions occur during the taxable year of a reporting corporation with a foreign or domestic related party.

This article will briefly explain the final and proposed regulations affecting Form 5472; it is not intended to convey tax or legal advice. If you have questions regarding filing of Form 5472 or any international tax matters, please contact owner Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd.

Form 5472 Final Regulation (T.D. 9667)

On June 10, 2011, under the above-mentioned IRC Sections, the IRS had previously published temporary regulations and a notice of proposed rulemaking by cross-reference to the temporary regulations in the Federal Register (76 FR 33997, TD 9529, 2011–30 IRB 57; REG–101352–11, 76 FR 34019) (2011 regulations), amending final regulations to provide that a duplicate filing of Form 5472 generally (previously required in Regulation Section 1.6038A-2(d)) would no longer be required, regardless of whether the filer files a paper or an electronic income tax return. This was determined because of advances in IRS electronic processing and data collections.

The 2014 final regulation, T.D. 9667, adopts the 2011 regulations without substantive change as final regulations, and removes the previous temporary regulations. The regulation became effective as of June 6, 2014.

Form 5472 Proposed Regulation (REG-114942-14)

On the same date as the final regulation was issued, the IRS concurrently issued proposed regulation (REG-114942-14). At issue was a provision (Treas. Reg. Section 1.6038A-2(e)), allowing for timely filing of Form 5472 separately from an income tax return that is untimely filed.

Because of the significant penalties involved for failing to file a timely and accurate Form 5472 (as noted in the proposed regulation and subject to reasonable cause exception, “an initial penalty of $10,000 (with possible additional penalties for continued failure) shall be assessed for each taxable year and for each related party with respect to which the failure occurs”), this process could be utilized by filers in such circumstances.

However, the IRS stated in the proposed regulation that, “with the benefit of experience”, it determined that the untimely-filed return provision was not conducive to efficient tax administration and that filing Form 5472 should not differ significantly from the methods and penalties applicable to similar information returns, such as Form 5471, (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”) and Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”). As noted in the proposed regulation, “those forms must be filed with the filer’s income tax return for the taxable year by the due date (including extensions) of the return, and there is no provision equivalent to the untimely filed return provision under § 1.6038A-2T(e) of the 2011 temporary regulations that would require or permit separate filing of those forms. See §§ 1.6038-2(i) and 1.6038-3(i)(1). Accordingly, it is proposed that the untimely-filed return provision contained in § 1.6038A-2(e) be removed.”

Contact Sherayzen Law Office for Help With Form 5472 Compliance

If you have any questions regarding the filing of your Form 5472 or you just need complex tax planning for cross-border business entities, please contact our experienced international tax team at Sherayzen Law Office, Ltd.