Category Archives: Other

  1. Thank You Team!!!

    • by Jimmy Sexton
    • April 18th, 2018

    Thank you to my entire team for all your hard work and dedication making sure everything got done by the April 17 tax deadline.

    I really appreciate you all!



  2. Foreign Trust Profits Can be Tax-Free When the Trust is Properly Executed

    • by Jimmy Sexton
    • June 20th, 2017

    A large number of clients I see are interested in ways to preserve their estate.  Whether it is for a spouse, partner, children, or their dog, the client wants to make sure their hard earned money remains protected and eventually benefits their heirs per their intentions.

    I am always disheartened when I hear that a client has been done a disservice by an advisor who didn’t understand the intricacies of international taxation. Unfortunately, there are a lot of do-it yourselfers and advisors that know just enough to be a danger to themselves and their clients; the story in this blog is a prime example, of just that.

    A U.S. citizen, I will call Charles, contacted me in February, not just to prepare his taxes, but to get some guidance on the best way to protect his sizeable portfolio, reap tax benefits, and ensure his heirs would benefit.  His plan was to place the portfolio in a foreign trust for the benefit of his U.S. citizen children. Charles explained that he had initially settled on a foreign trust because, based on his research, they offered better asset protection than domestic trusts. But his accountant gave him some misinformation that made him reconsider.

    Based on Charles’ research, he had believed that when he transferred the assets to the foreign trust, it would be considered a completed gift. His understanding was that once the completed gift was made, which would be subject to gift tax, that the portfolio would belong to the trust, rather than him, and that the trust, rather he, would be required to pay tax on the portfolio’s income.  And the biggest bonus Charles thought, was that because he had chosen the tax-free jurisdiction of the Cook Islands for the trust, all future income of the portfolio would be tax-free.

    Charles had a gross misunderstanding of how foreign trusts with U.S. settlors and beneficiaries are taxed. His bubble was burst when his accountant informed him that if a U.S. person transfers assets to a foreign trust, even if an irrevocable one, with U.S. beneficiaries (which his children are) then the transferor of the assets is treated as the owner of those assets for income tax purposes. In other words, he would have to continue to pay U.S. income taxes on the trust’s portfolio income. Based on this correct information, Charles scrapped the foreign trust idea and went with a U.S. irrevocable trust, which is subject to compressed tax rates.

    Luckily for Charles, his accountant did give him correct information. Unfortunately, his accountant, not being an international tax expert, missed a little known strategy. The method allows you to transfer assets to a foreign trust with U.S. beneficiaries where neither you, nor the beneficiaries, have to pay tax on the trust’s income until a distribution is made to the beneficiaries, or they receive the benefits of its assets. The exception involves selling the assets to the foreign trust pursuant to an installment sale. There may be capital gains tax if there is an unrealized gain built into the assets, but the long-term savings may make it worth it!

    With the new information I provided, Charles is now in the process of revisiting the foreign trust idea. While Charles’ advisor didn’t give him incorrect information, he did not give him complete information. Had Charles spent the time and money to seek out an international tax specialist, he would have not only gotten correct advice, but the benefit of a specialist’s additional knowledge that non-specialists lack.


  3. If you own a foreign corporation – The IRS is coming for you!

    • by Jimmy Sexton
    • June 13th, 2017

    Over the years I have encountered an untold number of situations with clients, or prospective clients, who are determined to do anything to avoid filing particular forms—including Form 5471.  The form, technically known as “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”, must be completed by U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations.  If not filed, the penalties, can be steep.

    I always insist that clients follow the tax laws and do things properly.  Clients not wanting to do things properly, can go elsewhere for their tax services.  In most of these situations the client or prospective client is convinced that “no one will find out” about their international holdings – like that makes not complying ok – and usually their reason for not wanting to file is simply to save money on accounting fees, not the additional taxes they may owe. The truth is, the forms, especially those reporting foreign entities, are complex, so it can be costly to have them prepared correctly; but not as costly as not doing it, or doing it incorrectly!

    A recent ruling in a federal case is just one example of why I remain firm in my convictions.

    An IRS audit revealed that a taxpayer failed to file Forms 5471 related to two Mexican corporations, and, assessed taxes and penalties related to the failure.  It was determined that the taxpayer did not show reasonable cause for his failure to file these forms because he did not provide his tax preparer with all the necessary information—it cannot be the tax preparer’s fault if he did not know!

    In this case, the taxpayer was a U.S. shareholder of a Mexican corporation that was a controlled foreign corporation (“CFC”), i.e. more than 50% owned by U.S. shareholders. Because of this, the taxpayer was required to file Form 5471. Additionally, the taxpayer had a second Mexican corporation, that was also a CFC, and he failed to file Form 5471 for it as well.

    The taxpayer tried to argue that he was not required to file Form 5471, because he only owned 9% of one of the Mexican corporations (10% generally triggers the Form 5471 filing requirements). To support his argument he provided the IRS amended articles of association reflecting his 9% ownership. The problem was, it did not appear that he ever disclosed this change in ownership to anyone. For example, the corporation’s bank account was opened with the original articles of association showing him as a 50% owner. Furthermore, the taxpayer and his wife made constant investments in and out of the bank account, and were the only two with signature authority over the account.

    Basically, it appears the taxpayer backdated the amended articles of association to show him as 9% shareholder for the sole purpose of presenting them to the IRS as proof he was not required to file Form 5471. The court looked at all the facts and circumstances and determined the taxpayer was liable for the penalties because it did not accept the legitimacy of the amended articles.

    I am not sure how transparent this guy really was with his tax preparer or if the preparer just failed to ask the right questions. I am also not sure what the final damage was, but if we consider taxes, penalties, and the cost of hiring someone to make an appeal (attorney and accountant fees)—we can be sure the  expenses would be far more than if the taxpayer had just done things right in the first place. Lastly, he is now on the IRS radar and you can bet they will be keeping him in their sites. This guy is lucky he did not wind up in jail, because it certainly appears – on its surface – he was lying about the change in ownership.

    The point of all of this is to explain that you cannot hide offshore investments!! You must report your interests or the IRS will find out and the consequence will be severe. Be honest. Report the situation accurately. Do not break the rules and try to avoid reporting. Believe me when I say, the cost of not reporting will be far worse than the fees to file the forms.



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