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I received a question about US citizens holding foreign assets and what kind of reporting is required. This is an important question and, unfortunately, there are still some people who get it wrong.
Let me tell you how it can go wrong. I heard this again just a couple of days ago. There are unscrupulous promoters who tell people that they can simply move their businesses offshore by having the ownership of the company be a foreign company. The income (they say) will all stay in the foreign company, which they shouldn’t report. Then, they can bring money back into the US, little by little, by using a debit card. Again, they say you can do all this and never pay tax or report it.
THIS IS NOT TRUE!
In fact, you can go to jail for up to 6 months for attempting such a flagrantly illegal plan. Let’s start with all the parts that are wrong with this so-called strategy sometimes touted by illegal offshore entity promoters.
First of all, there are the 3 Cs that you need to watch out for when planning to move a business offshore to reduce or eliminate US tax. These are: customers, capital and cash. You’ll need to make sure your customers and fulfillment are not linked to the US. The ownership needs to be by a foreign company. And the cash, for the most part, needs to stay outside the US. If you breach any part of these, you will have US income tax. But even if it’s all foreign income, you still have to report financial investments, investments in foreign companies and the movement of cash from the US offshore.
If you don’t report, you can be subject to fines of $10,000 and more (up to half of the balance of your financial accounts) and get criminal penalties up to 6 months. Reporting doesn’t mean you have to pay tax. But it can mean big penalties if you don’t.
You also might need to pay taxes if you’ve got US customers, fulfillment within the US, ownership by a US company or individual or take the cash back to the US.
You don’t need to remember all of the rules. You don’t need to know which forms to use. But you do need to know who is a good advisor and who is a scam artist. If you get the wrong information, and follow it, you’ll be the one paying the big fines.