Wonder About A Shell Company
In light of the recent scandals, you might be wondering yourself if your name came up on the list of “Offshore Billionaires evading taxes”. Truth is, few of us know that owning a shell company or having an offshore bank account is NOT synonymous with tax evasion. It is indeed heavily related to aggressive tax planning, but all within the law.
Many foreign nationals own a shell company in the USA with the objective of facilitating their business dealings in the USA. Perhaps they are wholesalers and would rather simplify their invoicing and customs dealings, maybe they hold rental real estate through single member LLCS to minimize liability, or maybe they just want to hold a trust anonymously (The latter one more involved). But in any of these situations you are just a tax form away from being able to legally getting away with paying less tax.
Shell Company Compliance
It’s not heavily involved, albeit it can be incredibly complex and as such is better off handled by tax professionals, but you are one tax form away from being in compliance vs. being a tax evader. A Form 1040-NR to report your personal US taxable income, a Form 1120-F for a foreign corporation to report US taxable income, Form 5471 to report ownership in a foreign corporation, Form 3520 to disclose a foreign trust and the FinCen Form 114 (FBAR) to disclose foreign bank accounts!!! And the list continues… and it is easily accessible to those who know how to look for the information.
And by completing the relevant required disclosure and income tax forms, you shall not have to worry about whether your name is on the Panama Papers leak or not.
If you have not completed the relevant tax forms regarding your Shell Company or foreign assets, then being on the Panama Papers leak should be the least of your worries. You should start thinking about Uncle Sam and the penalties related to unreported foreign assets and income.
Potential Shell Company Penalties
For the FBAR form, it alone carries a penalty structure that few defend as appropriate, racking up to 50% or more of your account balance in penalties. Form 3520, if you decide to leave an offshore trust or foreign gift unreported, will start with $10,000 per year – as does Form 5471.
This is the real driver behind the Panama Papers. In recent years the IRS has revamped their offshore compliance efforts, which started by giving a more focused attention to the foreign bank account reporting through with the FinCen Form 114 to opening a Pandora’s Box that has so far produced a large volume of voluntary disclosure submissions, or amnesty as some call them, and served to prepare the mood for a FATCA roll-out – the foreign account tax compliance act that directs an x-ray beam on hidden assets worldwide.
Since then we have seen different whistle blowers give up banking information, prominent business men turned into the IRS, and now at a much larger scale the Panama Papers leak.
But if you are involved with either foreign assets or a shell company, and you are up to date with your IRS reporting requirements, then all that you should worry about is the bad reputation of tax evasion that comes with having offshore assets.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
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Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
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