U.S. Tax Compliance for Offshore Investors

Who Needs This Guide?

If you have formed a foreign trust, you are required by the IRS to file Forms 3520 and 3520-A
If you are an officer, director or 10% or greater owner of a foreign corporation, you are required by the IRS to file a Form 5471 and you may also be required to file a Form 926.
If you are a partner in a foreign partnership or joint venture you are required to file a Form 8865.
If you are a 100% owner of a foreign entity that has elected to be treated as a disregarded entity, you are required to file a form 8858.
If you receive any distributions from a foreign mutual fund or dispose of any shares, you are required to file a form 8621.
These forms are dramatically different from comparable forms for domestic entities.
Very few domestic tax professionals are familiar with these forms.
And --- there are obscene penalties for a late filing of any of these forms.

U.S. Tax Compliance Guide for Offshore Investors

U.S. citizens and residents who have assets outside the U.S. (for an assortment of non-tax reasons) have to decide whether they want to comply with the U.S. tax rules or whether they want to take their chances on getting caught in one of the many IRS projects to locate and prosecute non-compliant offshore investors. For those who choose to comply, they need to be aware of the substantial differences between the kind of information needed for a domestic tax return and what is required for a return for a foreign entity or investment.

If a tax preparer is aware of the rules and has all of the required information, it doesn't take more than a few hours to prepare most of the tax information forms for foreign entities like foreign corporations (Forms 5471 and 926), foreign partnerships (Form 8865), foreign trusts (Forms 3520 and 3520-A) and foreign disregarded entities (Form 8858).

But this doesn't include the time that is required to locate the necessary information and to organize it so that it can be used to prepare the required returns. (This also doesn't include the time required to prepare returns for large operating entities.)

For every hour spent filling out one of the forms listed above, there are often five to ten hours (or more) dealing with accounting problems and currency conversions.

In many cases, currency conversions must be made on a transaction by transaction basis -- which can become very time consuming.

Part of the reason is the IRS and the tax law. But another part of the problem is that very few of the foreign trustees, banks and money managers really understand the sort of detailed information that is needed by the U.S. tax preparer for offshore investors. The information provided to U.S. investors by foreign banks or money managers is rarely suitable to prepare the returns required by the IRS.

For the past few years, I've written a number of memos to various clients about the information that is needed to prepare their foreign information returns. For most clients, I have also had to write long memos and checklists to offshore trustees, foreign bank employees or foreign money managers to explain what kind of information is needed to comply with the U.S. tax laws. I was in the process of updating some of those memos (and some related articles) to send to current clients and their offshore money managers but the project just seemed to grow. I discovered that the subject was a lot more complicated and involved than what could be put into a simple memo.

This guide is a combination of the various checklists, memos and articles I have used with my U.S. clients who have assets in an offshore trust, corporation, partnership, disregarded entity or mutual fund. It is a by-product of over ten years of working with foreign trustees and money managers for offshore investors.

It should help to save numerous hours for a U.S. tax preparer, for their clients and for their foreign trustees, money managers or business accountants. To my knowledge, there is nothing comparable to this guide anywhere in print.

There are different and sometimes conflicting rules for different kinds of entities. The information required is often far more than a set of financial statements or a copy of a checkbook or a checking account statement.

There are ambiguous currency translation issues.
Few clients understand the full impact of the varied rules involving related parties -- which includes certain relatives and corporations, partnerships and other entities controlled by the taxpayer or which control the taxpayer.
There are different accounting methods that apply in different circumstances.
Individuals and small companies that are accustomed to a simple cash or hybrid method of accounting discover that their foreign entity must use GAAP or fair market value accounting.
Investment portfolio reports that focus on performance are rarely suitable for preparing a tax information return for the IRS.

As I tried to put together a comprehensive, edited and updated collection of my memos, checklists and articles dealing with this topic, it evolved into a small book of about 100 pages, exclusive of the glossary. A copy of the new "U.S. Tax Compliance Guide for Offshore Investors" is now available on the Offshore Press subscribers' web site as a PDF document. For $240 you can have access to ALL of my e-books and my twice monthly email newsletter for a full year.

Or you can buy a copy of this guide as an e-book (in PDF format) or as a printed book in a 3 ring binder.

Because this is a genuinely unique document for the benefit of a very limited market and because it can provide many hours of time savings for offshore investors, I asked a number of my colleagues in the international tax community what would be a fair price for an e-book version of this guide. The answers ranged from $75 to $200. I decided to set the price of the e-book at $97.00 and the price of the printed edition at $127.00.

The point is that this guide is not for everyone.

Someone once asked J.P. Morgan how much it cost to maintain his ocean going yacht. He is reputed to have said, "If you have to ask, you can't afford it."

Anyone who finds the price of this guide to be excessive doesn't really need it.

Those who really need and will benefit from this guide are not likely to find the price to be excessive as compared to the many hours of time it will save for tax preparers, trustees and money managers.

The guide has been divided into four parts for the convenience of clients and preparers.

    * The first part provides an explanation of the unique differences between the reporting and accounting rules for U.S. entities or investments and the rules that apply to the same entities or investments outside the U.S. Call it background.

    * Part II of the guide includes a checklist and commentary about the information the tax preparer needs in order to prepare each of the most common foreign information returns like the Forms 5471, 926, 3520, 3520-A, 8865 and 8858. Customers are welcome to copy those checklists to send to foreign trustees and money managers.

    * Part III of the guide approaches the subject from the perspective of different kinds of investments.

    * The Appendix includes some more technical comments and information for tax professionals.

One of the most confusing and ambiguous issues for preparers of these information returns is the required treatment of currency gains or losses in connection with offshore investments. So I have compiled the results of about a dozen hours of research on the U.S. tax treatment of currency exchange transactions for investors in the Appendix.

I've also included some information about the tax rules for the foreign tax credit and for passive foreign investment companies. Finally, I've included a number of links to web pages with additional information and I have included a glossary.

I make no claim to being any sort of "authority" relative to this subject and would welcome feedback from other international tax professionals regarding any disputed or controversial tax interpretations. I would also welcome feedback about anything in this guide that needs clarification, which I will respond to in the Jacobs Report on a time available basis.

(Note: The only authoritative source of tax law is the Internal Revenue Code, various IRS Regulations and Revenue Rulings and applicable court decisions.)

U.S. Tax Compliance Guide for Offshore Investors by Vernon K. Jacobs, CPA How to Venture Offshore Without Getting in Trouble with the I.R.S.