ELITE ADVISOR BEST PRACTICES
Protecting Clients with Overseas Assets
What advisors frequently overlook can land their clients—and themselves—in hot water (first in a series)
By Cecil Nazareth
- Thinking globally is no longer optional for elite advisors. It's essential to have a good grasp of your clients' international holdings.
- Form 8938 Specified foreign financial assets is a new IRS form that requires all U.S. taxpayers to report their foreign assets and income (assets above $50,000 single or $100,000 married filing jointly).
- Foreign bank Account Reporting (FBAR) has not gone away. It's yet another chance for voluntary disclosure (Form TD 90.22-1) of all your foreign bank accounts (signatory authority and bank balances exceeding $10,000).
- Optimize your global tax portfolio/position by understanding where the income gets taxed, and then analyze the after-tax income.
As I mentioned in my last article, having a global view of the investment spectrum is essential. You really can't call yourself an “elite” financial advisor anymore unless you have a good grasp of your clients' international holdings as well as the international interests of any businesses in which they are an owner.
As most elite advisors are aware, U.S. citizens and residents are taxed on worldwide income. Also having physical presence in a country can trigger tax liabilities in the U.S. and/or abroad. Remember the old days when we spent time worrying about our clients' interstate tax credits between, say, New York and New Jersey? Today it is all about handling their tax credits between the U.S. and other countries.
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In my 30-year professional career, I have never ceased to be amazed by the number of HNW individuals (and financial advisors) who don't realize all the tax liabilities they're exposed to.
Here are some key areas to be aware of:
- People and taxing jurisdiction. You need a deeper understanding of which country taxes what part of your client's income.
- Foreign income that's not included on a client's U.S. tax return.
- Credit for taxes paid in other tax treaty countries (Foreign Tax Credit) is often missed.
- Tax consequences for U.S. citizens working abroad and for foreign citizens working in the U.S.
- Tax consequences for U.S. corporations doing business abroad and foreign corporations doing business in the U.S.
- Estate plans often omit foreign assets.
Getting clients' international houses in order
In order for your clients to get their financial houses in order, they need to get the required information from each foreign country in which they are invested, including backup for all liquid and non-liquid assets they own. This can be a challenging assignment because documentation in some areas of the world (Asia, for example) is not as readily available as it is in the U.S. or Europe.
As I mentioned in my last article, investing abroad presents great opportunities but brings its own set of risks. There are political risks (unstable governments), economic risks (returns and principal may not be easily repatriated) and tax risks. Also, corruption (which we euphemistically call lobbying in the U.S.) is a way of life in emerging markets, and it is harder to estimate the real fair value of investments (especially non-quoted investments). It can be hard to compare a client's investments on an after-tax basis and accurately report the capital appreciation.
IRS cracking down
In these difficult economic times, the IRS, state governments and government regulators around the world are in dire need of revenue.
Did you know?
- The IRS has employed more than 5,100 new agents.
- The international section has been ramped up to track delinquent filers.
- Under the Service's whistle-blower program, the person or entity who blows the whistle on an offender gets a bounty of 30 percent of the revenue collected by the IRS.
A quick word of advice: Always be nice to that ex-spouse, employee or former employee even if the person irks you sometimes.
We strongly recommend that people come into compliance as soon as possible, because if the IRS reaches you first, you cannot elect participation in the Offshore Voluntary Disclosure Initiative (OVDI), a new government amnesty program.
FBAR (Foreign Bank Account Reporting)
IRS Commissioner Doug Shulman has said repeatedly that his main objective is “to bring people in compliance.” Swiss banks have turned in thousands of names and account numbers and have agreed to pay millions in fines to the U.S. Treasury. Recent IRS cases against UBS, HSBC and Credit Suisse have turned the spotlight on Foreign Bank Account Reporting (FBAR) compliance. International transactions are facing renewed scrutiny. It's essential to get an inventory of your clients' international portfolios and consult with a knowledgeable CPA or tax attorney who understands international tax.
Voluntary disclosure up close
After two successful programs in 2009 and 2011, the IRS introduced a new OVDI program in January 2012. The intent of OVDI is to ensure that people come forward voluntarily. If you're not up to speed on OVDI, here are some things advisors should know about it:
- 2012 OVDI has no due date (it is open-ended).
- Tax years from 2003 through 2011 are being amended.
- Offenders face penalties of 27.5 percent of the undisclosed asset if greater than $75,000 or 12.5% if the amount is less than $75,000.
- The FBAR penalty is in addition to back taxes owed and 20 percent accuracy-related penalty and interest.
Some wealthy U.S. citizens have not been reporting assets and income held in foreign countries. Recent cases against UBS and HSBC have shed light on the IRS' renewed crackdown on taxpayers who fail to report foreign assets and foreign income on their U.S. income tax returns. In February 2011, the IRS launched an amnesty program called Offshore Voluntary Disclosure Initiative (OVDI).
This program was designed to grant amnesty to taxpayers who came forth voluntarily before August 31, 2011, and disclosed their assets and filed amended returns for the 2003 through 2010 tax years. The FBAR penalties are steep—they can be as high as 50 percent of the client's bank balance or $100,000 with a possible jail term for willful noncompliance. More than 33,000 have come forward so far, and there are probably hundreds, if not thousands, more violators who have still not stepped up.
Types of FBAR penalties
Think globally, act locally. Start by getting your clients' international houses in order now. Understand the risks and rewards of investing globally. Keep current with international finance, accounting and tax regulations and policy shifts. Also, network with experts in international tax, finance and accounting matters who can guide you along the way or leverage their resources (especially in foreign countries).