In the first days of January 2012, the Overseas Radio Network will begin broadcasting, aiming at people who desire for one reason or another, to leave the United States and set up a new life elsewhere.  It will be primarily talk radio that will be broadcasting online.  There will approximately 40 show hosts with various themes and topics, most of whom are experts in their fields.

Yours truly (P.T.) will have a show entitled: “The Second Passports and Expatriation Report: The Life of a Perpetual Traveler.”  This will be a 60 minute program that will commence at 16:00 US Eastern Time.  My friend and colleague Mark Nestmann will be a guest on the show from time to time.

I invite you to join me each Friday as I discuss second passports, loss of nationality, immigration, travel experiences and opportunities abroad.  We will also take calls from listeners during that time.

For further information, please see overseasradio.com.

Here are the links to the archived interviews:

This Week in Money: http://talkdigitalnetwork.com/2011/12/this-week-in-money-9/.  My interview starts at 31:33. In this interview I give a chapter by chapter breakdown of my book The Lifeboat Strategy, including numerous practical recommendations to lower your vulnerability to lawsuits, asset seizures, and other threats

Sovereign Man: http://withoutborders.libsyn.com/mark-nestmann-on-201-9efc9f-mp3 . In this interview, I discuss my personal experience with “civil forfeiture,” and how that led to my interest in offshore asset protection. Simon and I also discuss what’s to come in the USA as the global financial system continues to deteriorate.

Enjoy listening!

The bill has passed both the Senate and House, and is now before a congressional conference committee to iron out differences between the House and Senate versions.

Because the bill, after all, funds the almighty military, there’s close to a 0% chance that it won’t show up on President Obama’s desk in the next few days or weeks. And, despite Obama’s threats to veto the bill, he won’t. More importantly, even if he did veto the bill, it wouldn’t change anything. The president already has or has assumed most if not all of the powers this bill provides. Perhaps that’s why leaders of both chambers have agreed to insert language to the effect that, “Nothing in this section shall be construed to affect existing law or authorities, relating to the detention of United States citizens, lawful resident aliens of the United States or any other persons who are captured or arrested in the United States.”

“Existing law or authorities” leaves a lot of room for abuse. For instance, President Obama claims the authority to assassinate U.S. citizens without a trial, and has done so on at least one occasion. In September, he authorized the assassination of Anwar al-Awlaki, a U.S.-born militant preacher with alleged al Qaeda connections. A U.S. drone armed with a missile subsequently killed Awlaki in Yemen.

The military also has authority under existing law to lock up U.S. citizens indefinitely, without trial or any due process whatsoever. That’s a consequence of the Military Commissions Act, enacted in 2006, which allows the president to throw anyone in a military prison, including U.S. citizens, without access to any court. With this authority, the law repeals, or attempts to repeal, the constitutional principle of habeas corpus.  If you’re classified as an “enemy combatant” under this act, there’s no requirement that a trial of any kind will ever occur. You can be held indefinitely at Guantanamo Bay or another military facility, without ever being accused of a crime.

The blogosphere seems to believe that this bill would make the entire United States a “battlefield.” Well, the United States already is a battlefield, in law if not in reality. In 2006, Congress authorized the president to deploy troops within the United States when, in the president’s judgment, the authorities of the state are incapable of maintaining public order. This may occur without the consent of state authorities. Two years later, the U.S. Army announced the first deployment of a combat brigade within U.S. borders since the end of the Civil War. It functions as an “on-call federal response force for natural or man-made emergencies and disasters, including terrorist attacks” and for “crowd control.”

So…the president can already assassinate U.S. citizens or detain them indefinitely without trial. Obama can also deploy the military anywhere in the United States to maintain public order. He can do so indefinitely, not just until the end of the hostilities authorized by the Authorization for Use of Military Force. In that sense, the authority in the National Defense Authorization Act is actually more limited than that which the president already possesses.

I don’t want to minimize the seriousness of provisions such as those in this bill. The fact that these powers already exist underscore the fact that Obama and for that matter any U.S. president already has the powers of a dictator, including the authority to assassinate U.S. citizens without trial or other legal process. Obama has the good political sense to use these powers only against individuals such as Anwar al-Awlaki. The real question is…

Who’s next?

Copyright © 2011 by Mark Nestmann

In case you missed it, on October 18, the IRS issued what’s called a “Chief Counsel Advice” (CCA) concerning what it calls “original electronic data files.” Basically, the IRS now asserts the right to issue a summons to force a taxpayer to provide this data within whatever statute of limitation applies for the type of examination the agency is undertaking. And that means that you need to be careful not to dispose of any electronic communications or records you maintain that might concern some future tax issue. Click here to view the October 18 CCA.

The Internal Revenue Code gives the IRS authority to review “books, papers, records or other data,” to confirm the accuracy of tax or information returns, calculate a tax liability, or collect any tax or penalty. To enforce these provisions, the IRS may issue a summons to you or any third party custodian of records relevant to the inquiry.

The standard of proof necessary to enforce an IRS summons is laughably low. All the IRS needs to demonstrate is that the investigation is legitimate, the inquiry is relevant to that investigation, the IRS doesn’t already have the information, and that the agency has followed all required administrative steps. This means any efforts to quash the summons probably won’t be successful.

What electronic records does the IRS want you to maintain? Essentially, it’s “metadata,” which Google helpfully defines as “a set of data that describes and gives information about other data.” But in the context of an IRS examination, or other demand for electronic data, metadata is information on who, when, and how electronic data was created. For instance, the IRS could request e-mail metadata including:

• Author
• Recipient(s), including cc and bcc
• Date and time sent
• Date and time received
• Subject
• Attachment relationship to original email (and metadata fields listed for e-documents)
• Forwarded e-mails; attachment documents and files

Fortunately or unfortunately, every email you send or receive probably has the metadata associated with it automatically included. So does every file you save on your PC. To get a sense of what information email metadata contains, look at the “Internet headers” your messages—sent and received—contain. It’s easy to produce this data if you save your emails or computer files without editing them. Editing the emails or files changes the metadata. But be careful: these changes may be recorded in the metadata!

This discussion may seem esoteric, but it’s not. It means that you need to be careful when deleting emails or other files that may have even the slightest relevance to an IRS investigation. For instance, unreported offshore accounts currently are an IRS hot-button issue. Earlier this month, the IRS revised the Internal Revenue Manual (IRM) to include additional guidance to agents investigating violations of the requirements for reporting foreign accounts on the Foreign Bank Account Reporting Form TD F 90-22.1 (FBAR).

Any U.S. citizen or permanent resident must file this form annually to acknowledge a financial interest in, signature authority, or other authority over foreign financial accounts outside the United States if the aggregate value of those accounts exceeds $10,000. Failure to file this form—and to keep all relevant records associated with it—can subject you to both civil and criminal penalties.

The new section of the IRM provides detailed guidelines to IRS agents for assessing FBAR-related penalties. It also makes clear that failing to keep the required records relating to the FBAR is a separate violation from failing to file the FBAR itself. The civil penalty for failing to file the FBAR is $10,000 for each violation. Now there are two possible fines: a $10,000 fine for failure to file and an additional $10,000 fine for failing to keep the appropriate records. You must keep the records for at least six years after the due date of the FBAR. For instance, for most U.S. taxpayers, the 2010 FBAR form was due June 30, 2011. That means you need to keep the relevant records relating to offshore accounts you held in 2010 at least until June 30, 2017.

One way to avoid the additional $10,000 fine for failing to keep the appropriate records would be to turn over those records in response to an IRS summons. But if you do so, that could give the IRS the ammunition to prove that you “willfully” failed to file the FBAR. That’s a much more serious violation punished with a maximum sentence of five years imprisonment and a $500,000 criminal fine.

What to do? There are no easy answers. One possible solution to the metadata dilemma is to avoid any type of electronic communication or storage for anything related to your taxes. That’s not realistic for most people, so the only other alternative is to save all foreseeably relevant electronic communications for at least three years after the due date for your “regular” tax return and six years for anything that’s offshore-related. And no, it’s not sufficient to print out emails, statements, etc. You need to save the original electronic records!

It may not make you feel any better, but the IRS isn’t alone in demanding metadata. An increasing number of lawsuits ask for metadata in discovery requests. In one case, lawyers representing employees eliminated in a corporate “downsizing” demonstrated that the corporation involved tried to delete metadata from electronic records. The records allegedly proved that the company had illegally targeted older employees to positions that were eventually eliminated. The corporation eventually settled the lawsuit with a payout of nearly $60 million.

A good rule of thumb is never to write in an email or store in an electronic file anything you wouldn’t want published on the front page of the National Enquirer…because that’s where it could wind up!

Copyright © 2011 by Mark Nestmann

If you’re interested a second passport from St. Kitts & Nevis, contact my office immediately at info@nestmann.com to get the paperwork started so that you can lodge your application before the deadline. Because the Federation effectively closes down for the Christmas holidays, I recommend having your application in St. Kitts by December 23. That’s only one month from now.

But perhaps I’m getting ahead of myself. Why would you want a second passport?

Today, governments increasingly use passports as instruments of coercion. For instance, U.S. citizens can be denied a passport simply for owing money to the IRS or in child support payments. Even U.S. citizens living abroad must pay tax on their worldwide income.  If they fail to do so, the government can decline to renew their passport.

Since governments use passports to enforce coercive laws and regulations, it only makes sense for those with the means to do so to acquire a passport from another country.

Having a second passport has numerous additional benefits:

• It can expand your travel possibilities. Even a citizen whose passport usually allows easy international access can find a visa denied due to travel restrictions, trade sanctions, or political disturbances.  For instance, the United States forbids U.S. citizens from visiting Cuba without obtaining a “license” from the Treasury Department.  No other passport carries such a restriction.
• It can reduce your profile to terrorists. For instance, travel in many parts of the world using a U.S. passport can make you an instant target for criminal or terrorist groups.  If you travel with a passport issued by a politically neutral country, you’ll present a much lower profile to anyone with an axe to grind against your country.
• It gives you greater travel privacy. A U.S. passport is now equipped with biometric identifiers and a radio-frequency identity chip.  It can potentially track you everywhere you travel.  If you use your U.S. passport to visit a country not favored by U.S. authorities, you may face questioning  (or worse) when you re-enter the United States.  But, if you use your second passport to enter that country instead, no record exists of your visit in your U.S. passport.
• It allows you to travel internationally if your primary passport is lost, stolen, or withdrawn. The first measure many governments take if you come under investigation, or become an “enemy of the state,” is to confiscate your passport.  A second passport renders that sanction much less effective.
• It gives you the right to reside in other countries. A passport from a member of the European Union, for instance, gives you the right to live or work in any of 27 EU countries.  Another example: a passport from a member of the Caribbean Community (e.g., St. Kitts & Nevis), gives you the right to live or work in most other CARICOM countries.
• It can aid in international tax planning. For Americans, a second passport has another benefit: it is an essential prerequisite to expatriation; i.e., giving up U.S. citizenship in order to permanently disconnect from U.S. taxing authority.

There are two options to obtain economic citizenship in St. Kitts & Nevis.

Option #1: The most practical strategy is to make a direct contribution to a foundation created for displaced workers in St. Kitts, the “Sugar Industry Diversification Foundation.” Total costs including all fees for a single applicant under this option come to about $230,000 or $285,000 for an applicant with up to three dependents.

Option #2: Alternatively, you may purchase qualifying property worth a minimum of $350,000. Because time is of the essence, if you want to apply before prices increase, I recommend the direct contribution (SIDF) option.

By the way, the St. Kitts & Nevis passport is an outstanding travel document. Holders of this passport can travel without a visa, or obtain a visa upon entry, to more than 130 countries, including nearly all of the 27 member countries of the European Union. You can also live or work in most members of the Caribbean Community (CARICOM), including Antigua & Barbuda, Barbados, Belize, Grenada, Guyana, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Suriname, and Trinidad & Tobago.

All applicants must pass a strict vetting process that includes a comprehensive criminal background check.

If you’re interested in taking advantage of this opportunity, I recommend that you contact me immediately at info@nestmann.com so that we can begin the application process. We’ve handled numerous successful applications for this program, and I’m confident that with our assistance, you too can be a proud citizen of the Federation of St. Kitts & Nevis.

P.S.  If you’d like to learn more about second passports, please click here for additional information.

Copyright (c) 2011 by Mark Nestmann

It’s not hard to see why foreign real estate investors find Phoenix attractive.  The weather is near-perfect most of the year, and prices are 50%-70% below their 2007 peaks.  I’ve confirmed from contacts in southern California, Las Vegas, and Atlanta that foreign buyers are very active in those real estate markets as well.

The money coming into U.S. real estate is likely to increase further if a bill recently introduced by Senators Charles Schumer (D-NY) and Mike Lee (R-UT) becomes law.  The VISIT-USA Act will, if enacted, create a new visa category that grants foreign buyers of qualifying U.S. real estate a new “homeowner visa.”  The minimum total purchase would be $500,000.

There are a few catches, of course. Foreign investors have to put up cash for their purchases—no mortgages or home equity loans allowed.  Plus, while buyers can bring their spouse and children with them to the United States, none of them can work here without obtaining a separate work visa.  Neither the buyer nor members of the buyer’s family are eligible to receive U.S. citizenship under this visa. Nor would they be eligible for any of the accoutrements of the welfare state, including Medicare, Medicaid, or Social Security.

Finally—and here’s where it gets interesting—the buyer must live in the home for at least 180 days a year.  Do you hear the sound of a mousetrap snapping shut?  You should, because this requirement eventually brings the buyer into the U.S tax labyrinth.

First, buyers must live in the home they purchase for at least 180 days annually to maintain their visa.  Over an extended time period, this makes them U.S. tax-resident and thus taxable on their worldwide income.  Under what the IRS calls the “substantial presence test,” aliens must pay U.S. tax on their worldwide income if they spend more than 183 days in one year in the United States.  Yes, 180 is less than 183, but the test also applies to aliens present in the United States for at least 183 days over a two or three-year period.  Without going through the technicalities, foreigners who spend an average of more than 122 days/year in the United States—including portions of days—must pay tax on their worldwide income.  More favorable rules may apply when aliens can also be considered resident in a country with a tax treaty with the United States.

Second, since the buyers are U.S.-tax-resident, they must comply with all applicable disclosure rules for foreign income and accounts.  Essentially, they will need to disclose every source of foreign income and every foreign account they own.  If they fail to do so, they face severe civil and criminal penalties.

Third, the buyers will need to disclose interests in foreign trusts, foreign corporations, foreign mutual funds, foreign retirement and pension schemes, and virtually every other foreign entity.  Civil and criminal sanctions await those who fail to comply with these obligations as well.

Fourth, the U.S. tax treatment of these foreign interests may be much less favorable than they would be in the buyer’s home country.  For instance, the U.S. “controlled foreign corporation” rules may force the buyer to pay tax on income or gain that would otherwise be tax deferred. Income or gain in pension or other retirement plans may likewise be taxed, rather than deferred.

Fifth—and here’s where it REALLY gets fun…let’s say the buyer suffers a fatal heart attack, dies in a tragic accident, or otherwise sheds his mortal coil while tax-resident in the United States.  That means his entire worldwide estate is subject to U.S. estate tax.  The current exemption is $5 million, with a top rate of 35%, but on Jan. 1, 2013 the exemption goes down to $1 million, with a top rate of 55%.

The only saving grace of the VISIT-USA proposal is that it would provide a “non-immigrant” visa.  Presumably, this would mean that individuals who obtain U.S. residence with this visa wouldn’t be subject to the U.S. “exit tax” if they stay for more than eight years, and then leave.  Currently, only citizens and long-term permanent residents may be subject to this tax when they expatriate—give up their U.S. citizenship and passport, and/or their U.S. permanent residence.

Of course, foreigners can always purchase property in the United States and take care not to live in it long enough so as not to become U.S.-resident.  But even here, there’s a trap.  Absent a more favorable treatment via an estate tax treaty with the country in which they’re resident, the entire value of that real estate is subject to U.S. estate tax, less a $60,000 exemption.  “Entire value” means any mortgage or other encumbrance on the property is ignored for estate tax purposes.  That means a non-resident alien could own a $300,000 house with a $250,000 mortgage, and his heirs would be subject to estate tax on the entire $300,000. Similar rules apply to investments in U.S. banks and brokerages.

Fortunately, planning opportunities exist to deal with these problems.  If you’re a foreigner and want to spend time in Phoenix or elsewhere in the United States, don’t stay long enough to be considered U.S. resident.  Foreign investors in U.S. real estate should also purchase real estate through a structure, rather than in their own name.  Done properly, this not only avoids U.S. estate tax, but also provides asset protection.

Confused?  We can help.  If you’re a foreigner considering investment in U.S. property, contact me at info@nestmann.com.  We can help set you up the appropriate structures to make sure you don’t get caught in the U.S. tax “mousetrap.”

Copyright © 2011 by Mark Nestmann

I just returned home from a visit to the Republic of Cuba and I couldn’t help but to notice that change was in the air. The government is serious about liberalization, and is gradually changing numerous laws, rules, and regulations to help spur economic growth. I welcome these changes, as they bode well for business opportunities in Cuba.

The most dramatic changes relate to property ownership. Cubans may now buy and sell automobiles without first obtaining a government permit. They may also buy and sell their homes without restriction, although a 4% transfer tax applies.

There is also much discussion about making it easier for Cubans to travel abroad. Ordinary Cubans want to scrap the hated Permiso de Salida (Exit Visa) so they can more freely visit friends and relatives in other countries. And, from my contacts in the country, the government may be listening.

Another change I noticed is more Americans in Cuba since my last visit. I recall visits in 2007 and 2008 (during the second administration of George W. Bush) where I didn’t see any Americans at all. The Obama Administration has made it somewhat easier for U.S. citizens to travel to Cuba, through its so-called “people to people exchanges.” Through the end of July 2011, the Treasury Department issued nearly 30 licenses to organizations that say they will provide “purposeful travel” to Cuba. This will supposedly encourage U.S. citizens to help ordinary Cubans in “support of their desire to freely determine their country’s future.”

However, numerous obstacles remain to free movement between the United States and Cuba. U.S. citizens must still obtain a “license” from the U.S. Treasury to legally visit Cuba. The licensing process is now liberalized, but the political regulations prohibiting sale of most Cuban products in the United States remain in place. Even foreign subsidiaries of U.S. companies are forbidden to trade with Cuba, with the exception of certain “humanitarian” items.

Contrast the economic liberalization in Cuba to events in the United States. TSA agents now roam throughout the United States, searching for subversive citizens. The U.S. Treasury has embarked on a vendetta against any U.S. taxpayer with offshore financial accounts. Prosecutors use the Patriot Act tens of thousands of times annually to obtain Internet and telephone records from U.S. companies, without bothering to obtain a warrant. The U.S. Justice Department even claims it has the right to attach a tracking device to your car, without a warrant, and follow you everywhere you go.

It appears to me that the United States will pass Cuba….but going in the opposite direction.

More than a decade ago, I acquired economic citizenship in the Commonwealth of Dominica. Shortly thereafter, I made the decision to give up my U.S. citizenship and passport. Expatriating from the United States has led to both an increase in my personal freedom and my economic opportunity. For instance, since I’m no longer a U.S. citizen, I’m free to visit, do business in, or invest in Cuba, without applying for a license from the U.S. Treasury.

Is expatriation for you? Contact me or my colleague Mark Nestmann at info@nestmann.com to learn more.

(P.T. Freeman is a pseudonym for a friend and business associate who is a former U.S. citizen.)

Ridiculous? Yes. But fortunately, the Tax Code contains an escape clause that allows you to earn up to $92,900/year tax-free (2011, adjusted annually for inflation) if you live and work outside the United States. If your spouse accompanies you overseas, you can double this exemption and jointly earn up to $185,800 annually, free of U.S. income tax obligations. You can also exclude or deduct some of your housing expenses from your gross income earned abroad.

These provisions are called the “foreign earned income exclusion” (FEIE), the “foreign housing exclusion (FHE),” and the “foreign housing deduction (FHD),” respectively. And, if the IRS and Congress have their way, they’ll soon be made more restrictive, if not eliminated altogether.

Our overseers in Washington, D.C. don’t view these provisions as a protection against double taxation—which is what they are. After all, nearly all U.S. citizens working abroad pay taxes on the local income they earn. Instead, Congress and the IRS perceive the FEIE as just another tax break, forgetting that most of these citizens have already paid foreign tax on the “excluded” amount.

A recent proposal for eliminating the FEIE came in the otherwise excellent “Back in Black” plan introduced by Senator Tom Coburn (R-OK) earlier this year. The Coburn initiative claims that the FEIE “subsidizes employers sending employees overseas” and “may work against U.S. domestic interests by encouraging highly compensated U.S. citizens to work overseas… expatriating U.S. intellectual capital and reducing U.S. tax revenue.” The report quotes a Congressional Budget Office study estimating that ending the exclusion would result in more than $70 billion in additional taxes over ten years. According to the CBO,

“One rationale for eliminating the exclusion for foreign earnings is that U.S. citizens with similar income should incur similar tax liabilities, regardless of where they live or what services they receive from the government. That principle is violated if people can move to low-tax foreign countries and escape U.S. taxation while retaining their U.S. citizenship. In addition, the existing exclusion represents an implicit subsidy to corporations that employ U.S. citizens abroad, because those companies can pay their employees less than they would if the income were fully subject to U.S. taxes. Moreover, ending the exclusion for foreign-earned income would lessen some of the complexity of the tax code.”

This so-called rationale ignores the fact citizens of every other major country need not pay tax on their earned income outside that country if they don’t live there. And it arrogantly asserts that the FEIE provides a tax subsidy to corporations employing U.S. citizens abroad. In reality, the FEIE merely helps level the playing field for U.S. citizens working abroad compared to citizens of any other country. In addition, wherever they live and work, U.S. citizens must also comply with the draconian reporting requirements for their foreign investments and businesses imposed by Congress summarized here. All these factors combine to penalize U.S. citizens living abroad, and make them—and by extension, the United States itself—less competitive internationally.

Without the FEIE, U.S. citizens working abroad only receive a tax credit for most income taxes paid to other governments. However, the foreign tax credit has numerous qualifications and exceptions. Many foreign taxes aren’t eligible for a tax credit, including property taxes, excise taxes, payroll taxes, and value-added taxes. While you can deduct most of these taxes from your taxable income, deductions are inherently less valuable than tax credits.

But facts and logic may not stop Congress from eliminating the FEIE. In 1962, Congress first began taxing the earned income of non-resident U.S. citizens. It created the FEIE to partially offset the additional tax and compliance burden on those citizens. Ever since, in almost every congressional session, one or more bills are introduced to end or restrict it. Getting rid of the FEIE was part of the Wyden-Gregg bill in the last Congress. The Joint Committee on Taxation classifies the FEIE as a “tax expenditure,” and like the CBO projects huge but unrealistic tax revenues with its elimination.

In the meantime, the IRS is cracking down on taxpayers claiming exclusions or deductions from their income earned abroad. It’s set up five separate initiatives to find taxpayers who don’t qualify for part or all of the FEIE.

In a FEIE audit, the focus is often on whether you have a “U.S. abode.” Naturally, there’s no hard-and-fast definition. In general, the more connections you retain to the United States while living abroad, the more likely it is the IRS will conclude that you have a U.S. abode. This is particularly true if you have permanent U.S. ties, such as a dwelling or a spouse and children remaining in the United States while you work abroad. Unless you can demonstrate stronger ties to the country where you’re working than to the United States, the IRS may deny all exclusions or deductions from your earned income abroad!

There’s only one way to escape the insane dilemma that U.S. citizens working abroad face. That’s to legally and permanently end your future U.S. tax and reporting obligations via a legal process called “expatriation.” This process requires that you give up your U.S. citizenship and passport if you’re a citizen or your green card if you’re a permanent resident.

Unfortunately, expatriation may trigger a big tax bill, and it doesn’t affect past tax and reporting obligations. You may also find it difficult or impossible to obtain a visa to return to visit the United States, unless you have a passport from a country that qualifies for visa-free entry. For more information on expatriation, see my special report, The Billionaire’s Loophole, available here. Or contact me at info@nestmann.com.

Copyright © 2011 by Mark Nestmann

The IRS recently issued a draft version of this Form 8938, along with preliminary regulations on how to complete it. They regulations don’t specify what you don’t need to report, but assuming they don’t change dramatically between now and the time they’re issued in final form, the following types of assets appear to remain non-reportable:

• Foreign real estate. If you own real estate outside the United States in your own name, I don’t know of any requirement to disclose that ownership on Form 8938 or on Treasury Form 90-22.1 (the “FBAR” form). However, you must also report and pay tax on any income from offshore property. And, if you own property through a foreign entity, you must disclose the existence of that entity on Form 8938 and file a separate information or tax return for it annually.

• Foreign life insurance or annuity policies. A foreign issuer of a life insurance or annuity policy could be considered a “counterparty” according to the definitions in the instructions for Form 8938. However, the examples listed in the draft instructions say nothing about foreign life insurance or annuity policies. But, you need to report these policies on the FBAR, as you can read here.

• Precious metals investments. It’s clear that if you hold precious metals through a bank account, you must report the existence of the account on both Form 8938 and the FBAR. But, if you hold precious metals in a safety deposit box or private vault box to which you have direct and exclusive access, they appear to be non-reportable. Other storage arrangements may or may not be reportable on the FBAR, but not on Form 8938, as precious metals don’t appear to be a “specified foreign financial asset.”  The safest recommendation is to report any type of offshore storage of precious metals in which you don’t have direct and exclusive access on the FBAR.

There’s much more to come in the continuing U.S. vendetta against all-things offshore. An increasing number of offshore banks and service providers won’t even deal with U.S. clients anymore, a legacy of the USA PATRIOT Act, over-zealous IRS investigations, and new regulations that force many offshore brokers who deal with U.S. residents to register with the  Securities & Exchange Commission.

And, beginning in 2014, money transferred from the United States to foreign financial institutions and non-financial entities will be subject to a 30% withholding tax. The only way to avoid the tax will be for the institution or entity to enter into a one sided disclosure agreement with the IRS. If entering into the agreement violates a foreign law, that’s too bad. The only alternative for the institution or entity is to get rid of its U.S. clients. Thousands of offshore banks and service providers are doing just that.

There’s only one way out of this mess for U.S. citizens and permanent residents. That’s to legally and permanently end your future U.S. tax and reporting obligations via a legal process called expatriation. This process requires that you give up your U.S. citizenship and passport if you’re a citizen, or your green card if you’re a permanent resident. It’s a big step, and one you shouldn’t take lightly. Expatriation may also trigger a big tax bill, and it doesn’t affect past tax and reporting obligations. What’s more, if you have U.S. property or income, you may still need to deal with the IRS even after you expatriate.

For more information on expatriation, consult the latest edition of my special report, The Billionaire’s Loophole, available here.  Or contact me at info@nestmann.com.

Copyright © 2011 by Mark Nestmann

When it came out in June, I thought the draft version of Form 8938 implied that you’d have to list details of virtually all property you hold outside the United States. I also wrote that its disclosure requirements might signify early preparations for an eventual wealth tax on offshore assets. But the June version also came without any instructions, so there was no way to know for sure.

IRS Guidance Now Focused on Financial Assets

Now, the IRS has issued a more comprehensive draft version of Form 8938 along with detailed instructions on how to complete it. A wealth tax imposed by separate legislation remains a distinct possibility, but the instructions for Form 8938 now focus on financial assets, not non-financial assets. Numerous types of non-financial assets held offshore remain non-reportable, as I’ll describe in Part II of this article.

FACTA provides that if you hold a “specified foreign financial asset” (SFFA), you must attach a disclosure statement to your income tax return for each year in which the aggregate value of all such assets exceeds $50,000, or a larger sum as directed by the IRS. You make this disclosure on Form 8938 and submit this form with your annual tax return.

These requirements cover tax years from 2010 forward. However, the IRS has suspended the 2010 reporting obligation until after Form 8938 is released in its final form. When it is, you’ll have to attach Form 8938 for any years in which reporting was suspended (currently, just 2010) to your first tax return in which the final version of Form 8938 is available (presumably, your 2011 return).

What’s a “Specified Foreign Financial Asset?”

The draft instructions follow the original language in FACTA fairly closely in defining these items:

SFFAs include the following assets:

1. Any financial account maintained by a foreign financial institution.
2. Other foreign financial assets, which include any of the following assets that are held for investment and not held in an account maintained by a financial institution.
(a) stock or securities issued by someone other than a U.S. person,
(b) Any interest in a foreign entity, and
(c) Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

I don’t have the space to describe all the criteria the IRS applies to define “financial account” and “foreign financial institution,” and “other SFFAs.” But, there are a few rules and definitions that you should know about:

• A financial account includes accounts maintained in U.S. possessions (e.g., the U.S. Virgin Islands, Guam, Puerto Rico, etc.). Even though these accounts aren’t technically outside the United States, you must report them on Form 8938 if you meet the reporting threshold.
• SFFAs held by a foreign corporate entity that you elect to have taxed as a “disregarded entity” (e.g., an offshore LLC) must be reported on Form 8938. That’s beside the fact that you must also file an annual disclosure form for the LLC, and quite possibly, a separate disclosure form for both the LLC and for you personally: Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
• You must report any interest in any foreign entity (e.g., foreign corporation, partnership, etc.) on Form 8938. However, if that entity isn’t taxed as a disregarded entity, you need only report your interest in that entity itself, and not the entity’s ownership of any SFFAs.
• Interests in jointly owned assets. A joint owner has an interest in the entire asset, which must be reported at its entire value. There is an exception if you jointly own reportable assets with your spouse who files a separate tax return, in which case you only report 50% of the value.
• Interests in assets held in financial accounts. You don’t need to report an interest in the assets held in a financial account if you report your interest in that account itself.
• A foreign financial institution includes investment vehicles such as foreign mutual funds, foreign hedge funds, and foreign private equity funds.
• If your income is below the filing threshold for a particular year, you don’t need to file Form 8938, even if the value of your SFFAs exceeds the reporting threshold.

Other SFFAs include the following, if held for investment:

• Stock issued by a foreign corporation
• A capital or profits interest in a foreign partnership
• A note, bond, debenture, or other form of indebtedness issued by a foreign person
• An interest in a foreign trust or estate
• An option or other derivative investment entered into with a foreign counterparty or issuer.

You need not report any of these SFFAs if you hold them for use in the conduct of any trade or business. For instance, let’s say you’re an exporter. Your foreign counterparty insists that you enter into an option arrangement to protect it from foreign currency fluctuations. When you do so, that arrangement apparently wouldn’t be reportable on Form 8938.

If all this sounds unbelievably complex, it is. If you meet the thresholds established for filing Form 8938, you’ll almost certainly need professional assistance to complete it.

Incidentally, Form 8938 in many respects duplicates reporting obligations that are already in place with respect to all U.S. citizens or permanent residents, no matter where they live. However, the IRS emphasizes that filing Form 8938 in no way relieves you of these your obligations to make these additional disclosures. The most important of these, but by no means the only one that may apply, is your annual obligation to file the FBAR.

Increased Filing Thresholds

One bright spot is that the filing thresholds are in many circumstances higher than the $50,000 figure FATCA suggested.

The Instructions provide that individuals satisfy the reporting thresholds if they have SFFAs of more than $100,000 at any time during the year

Unmarried persons living in the United States you must file Form 8938 if the total value of their SFFAs on the last day of the year exceeds $50,000, or if that value exceeded $100,000 at any time during the year. The same rules apply to married taxpayers filing separate returns and living in the United States. That threshold doubles to $100,000 for U.S.-resident married taxpayers filing a joint return

Bona-fide residents of foreign countries who must file U.S. tax returns by virtue of their status as a U.S. citizen or permanent resident have higher thresholds. For foreign residents not filing a joint tax return, Form 8938 is required only if the total value of their SFFAs is more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.  For foreign residents that abroad and file a joint tax return, the threshold rises to $400,000 and $600,000, respectively.

So…What’s Non-Reportable?

That’s a great question, and that I’ll report on in my next blog entry. Until then, if you’d like to review the draft instructions for Form 8938 for yourself, click here.

Copyright © 2011 by Mark Nestmann