Tax Reporting Requirements For Offshore Asset Protection
Many callers and clients express interest in offshore asset protection planning. I have prepared some offshore trusts and many offshore limited liability companies over time. Any type of offshore asset protection is complicated, in part, because of IRS reporting requirements applicable to foreign entities. I suspect there are many people with offshore asset protection entities who don't understand or comply with tax reporting rules. For example, a single member domestic limited liability company is by default a disregarded entity for tax purposes. This means the LLC on the entity level reports nothing to the IRS and is not required to get a separate tax number. The member treats the domestic LLC as a sole proprietorship for tax purposes. A single member foreign LLC established by a U.S. resident must file an election form 8832 to claim disregarded entity status. If it does not file this form timely the LLC may be treated as a C corporation and subject to corporate taxation. In addition, the offshore LLC once electing disregarded status must file information form 8858. Offshore entities taxed as partnership or corporation have different filing requirements.
Most people who create offshore entities cause the entity to maintain a bank account outside the U.S. These people are required to notify the IRS about offshore financial accounts withover $10,000 (aggregated) by filing an IRS form TDF90-22.1. U.S. taxpayers must disclose all offshore financial accounts for which they have signatory authority, or for which they have control over a third party who has signatory authority, by filing the TDF90-22.1. For example, if you appoint someone to be a manager of your foreign LLC, and the manager maintains a financial account offshore, you must file this tax form. The TDF90-22 form is due on or before June 30th, and there are no extensions. You can control an offshore account, but you must disclose it to the IRS. Offshore accounts also must be disclosed on your 1040 income tax return. Willful non-compliance is criminal.
If you are engaged in offshore asset protection you must consult with a CPA experienced in international tax or a tax attorney. The tax reporting requirements are one of the reasons I usually try to accomplish asset protection with domestic tools under Florida exemptions before recommending more sophisticated offshore entities.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
