Tax Reporting For Offshore Asset Protection Entities
Any type of offshore asset protection is complicated, in part, because of IRS reporting requirements applicable to foreign entities. People considering offshore asset protection should consult with a tax attorney or a CPA experienced in international tax. There are severe penalties for failure to comply with foreign entity reporting requirements. Following are examples of tax reporting applicable to offshore entities:
Limited Liability Companies
A single-member domestic limited liability company is by default a disregarded entity (“DE”) for tax purposes. The domestic LLC on the entity level reports nothing to the IRS and is not required to get a separate tax number. Any domestic LLC is by default a DE unless it elects a different tax status by filing Form 8832 with the IRS.
A single-member foreign LLC established by a U.S. resident must file an election Form 8832 to claim disregarded entity status. If this form is not filed timely the LLC may be treated as a C-corporation and subject to corporate taxation. In addition, the offshore LLC after electing disregarded status must file information Form 8858. Offshore entities taxed as a partnership or corporation have different filing requirements.
U.S. taxpayers, domestic trusts, or domestic corporations must report any transfers to a foreign corporation by filing IRS Form 926. A U.S. taxpayer who directly or indirectly owns any interest in certain foreign corporations may have to file IRS Form 5471. The IRS has different categories of persons with varying filing requirements.
Any U.S. taxpayers that controls a foreign partnership must file Form 8865. A person controls a partnership if they hold more than 50 percent of the partnership interest. If no partner has a controlling share, then all partners with more than 10 percent partnership interest must file Form 8865. In addition, U.S. taxpayers who acquire or dispose of partnership interest in a foreign partnership must disclose the transaction to the IRS. Most foreign LLCs with two or more persons are a foreign partnership for tax purposes.
Reporting Foreign Bank Accounts and Financial Accounts
Most people who create offshore entities have the entity maintain a bank account outside the U.S. These people are required to notify the IRS about their offshore financial accounts by filing a 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 reporting form . The TDF90-22 form is due on or before June 30th of each year 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 in Part III of Schedule B. Willful non-compliance is criminal offence.
If you are engaged in offshore asset protection you must consult with a CPA experienced with international tax issues 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.