With the deadline to file the Report of Foreign Bank and Financial Accounts (FBAR) just a few days away on June 30 (no FBAR extensions allowed, so file on time), we are thinking about offshore assets and overseas bank accounts.
We received a call from a gentleman who wanted assistance registering a company in California, so he could work in the state, but he had originally set-up the corporation in the British Virgin Islands (BVI).
We wondered why he had established the business as an offshore company if he wanted to work stateside under that business name, but we assume his original intention was to obtain ultimate privacy and tax savings, which we presume is why most people move financial assets to an overseas account.
We discussed this topic on a recent edition of our weekly radio and web broadcast on KDOW 1220 AM, Wealth Management and You with Connie Yi.
What a BVI Corporation Is and Isn’t
A BVI corporation offers several benefits to its owners, including personal anonymity and some tax savings, but they are not intended as tax havens, as is often perceived, because both the IRS, through its Offshore Voluntary Disclosure Initiative (OVDI) program, and the BVI government aggressively coordinate efforts to prevent white collar crime and tax evasion.
It has been reported by ABC News that Mitt Romney takes advantage of the tax savings offered by offshore companies. We suspect it would be difficult to run for our government’s highest office if he was defrauding the IRS, so we will assume he will disclose his percentage of ownership of overseas businesses when he files his 2011 tax return.
Overseas Bank Accounts Then & Now
Until the UBS scandal in 2008, when a whistleblower exposed account holders hiding assets overseas, the trend for U.S. taxpayers was to not report offshore assets. Since then, the IRS has been vigilant in pursuing its rightful share of revenue from overseas assets and it has collected $4.4 billion in back taxes through the OVDI.
Now, even franchised tax preparation services like H&R Block ask about overseas assets on their tax worksheets, so pleading ignorance about the requirement to declare offshore assets on Form 8939 is no longer an excuse, though it never was legally. You can also e-file your FBAR declaration.
BVI Corporations for Legitimate Global Business, Not Tax Evasion
Owning a BVI corporation is not for amateurs, even though you can easily and inexpensively register one online. We believe owning a foreign business entity is like waving a red flag at the IRS, which makes you more susceptible to an audit.
You should only create a BVI corporation if you have legitimate business financial needs, usually involving global trade, and the knowledge to benefit from the advantages they offer – without suffering from possibly increasing your visibility to IRS auditors.
So, what are the options for BVI business owners who may not have been reporting those offshore corporate assets to Uncle Sam in the past? Should they report them to the IRS now? Can they shut them down? If so, what is the safest way to do that and transfer the funds to a U.S. account without arousing suspicion?
Naturally, each case will be different and each BVI corporation stockholder will need to base the decision on individual circumstances and the personal risks involved.
If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.