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Old 17-02-2015, 12:14   #1
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Tax Liability

I'm not sure this is the right place to ask so apologies in advance if it isn't. Here's my question:

I've owned a catamaran for the last 8 years (US Built) that has been registered to a BVI corporation. It has been strictly used for personal use and over the 8 year period I've paid all taxes due. Recently, my accountant advised me that I should have been filing an IRS Form 5471 ("Information Return of U.S. Persons With Respect to Certain Foreign Corporations") reporting my ownership of the foreign company. Failure to file the form can result in enormous penalties should the IRS discover my ownership interest. Of course I knew that if I had a foreign bank account or other income producing assets, (I don't) a filing would be required. I never dreamed that the ownership of a family boat in a BVI Company would trigger a filing. It all gets very complicated and falls into a very arcane area of tax law. I'm wondering if someone on this forum has run into the issue and could refer me to a knowledgeable (and efficient) tax lawyer? Many thanks
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Old 17-02-2015, 12:46   #2
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Re: Tax Liability

Disclaimer: I'm not an accountant or an attorney.

Do any revenues flow through the company? I imagine that at the federal level all they are concerned with is capturing potentially taxable income.


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Old 17-02-2015, 13:12   #3
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Re: Tax Liability

David-
You say it has been owned by a BVI corporation, but actually was only used personally. The IRS could deem that to be a "sham corporation" as it has no legitimate business then. Because that can always complicate life, I'd suggest you want a tax lawyer, someone who is both an enrolled agent (or CPA) and attorney, familiar with foreign asset problems.
A somewhat specialized and expensive area. Presumably you did not have a professional tax preparer failing to advise you of this problem?

If there's no genteel solution to be had (and tax attorneys often can negotiate one with the IRS) it might be best to "wash" the corporation and ownership and start fresh by buying it with a new one, then gambling on the IRS not finding the old one. Still, that's gambling.

Note: I'm not allowed to give legal advice, or gambling advice, across state or national lines.
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Old 17-02-2015, 13:48   #4
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Re: Tax Liability

David,
I don't think you should worry about it. I'm not and in the exact same situation. Your not hiding income, your avoiding paying taxes - legally.
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Old 17-02-2015, 13:56   #5
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Re: Tax Liability

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Originally Posted by Palarran View Post
David,
I don't think you should worry about it. I'm not and in the exact same situation. Your not hiding income, your avoiding paying taxes - legally.

The issue is not declaring the interest in the foreign corporation.
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Old 17-02-2015, 14:03   #6
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Re: Tax Liability

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Originally Posted by Palarran View Post
David,
I don't think you should worry about it. I'm not and in the exact same situation. Your not hiding income, your avoiding paying taxes - legally.
The new Federal disclosure laws are exactly that... disclosure. Failing to tell the IRS of every overseas Bank Account AND every overseas corporation you have a stake in, is an offense. The offence is not how much money you have in these although this may have bearing on the size of the penalties levied.

If you disclose you are not committing an offence. There is nothing illegal about having foreign assets. (Yet). What is illegal is not letting the IRS know. Its like taking money in and out of the country. You are allowed to go through customs with say $30,000 in your pocket as long as you disclose it. If you don't disclose it you will be breaking the law and for a start they will confiscate all of your cash.

Did you ask your accountant why he didn't tell you about this before now?
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Old 17-02-2015, 14:48   #7
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Re: Tax Liability

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Did you ask your accountant why he didn't tell you about this before now?
No. First I'd have to tell him about the boat Uh Oh.
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Old 17-02-2015, 14:54   #8
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Re: Tax Liability

My understanding is that, as a US citizen, your US tax return must include an accounting of any foreign companies and businesses you own. For example, I know someone who had a rental property abroad, and stated the income and / or loss on the US tax return.

You should have done the same, even if it ran at a loss or broke even. If you paid foreign tax, that can usually be offset against your US tax liabilities, if there is a dual taxation agreement with the foreign country.
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Old 17-02-2015, 15:30   #9
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Re: Tax Liability

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Originally Posted by OverboardDavid View Post
I'm not sure this is the right place to ask so apologies in advance if it isn't. Here's my question:

I've owned a catamaran for the last 8 years (US Built) that has been registered to a BVI corporation. It has been strictly used for personal use and over the 8 year period I've paid all taxes due. Recently, my accountant advised me that I should have been filing an IRS Form 5471 ("Information Return of U.S. Persons With Respect to Certain Foreign Corporations") reporting my ownership of the foreign company. I'm wondering if someone on this forum has run into the issue and could refer me to a knowledgeable (and efficient) tax lawyer? Many thanks
This is not tax advice; I am just a tax payer who has gone through similar stuff at work.

Forms 5471 were a big thing in multinationals back in 2009 when the IRS got serious on this form. I have used KPMG for a similar issue at work in my prior life but that is probably unnecessarily expensive. Unfortunately the nice way out for people in your position (called "OVDP 2012 FAQ 18") was closed a few months ago I think. Now there is a way out but it is not as easy as before.

See:
Delinquent International Information Return Submission Procedures
Delinquent International Information Return Submission Procedures Frequently Asked Questions and Answers

Mike Kimball (mikek@yachtstaxadvisor.com) is very good at US tax advice related to boats and (unlike some goes who peddle tax sham schemes to sell boats) will tell you the whole story, even what you do not want to hear. I have not used him for international stuff but I trust him for US income tax issues on boats.

Just ask him if he has experience with FAQ 18 of OVDP 2012, the new "Delinquent International Information Return Submission Procedures" that replaced FAQ 18 and the concept of "reasonable cause not to file a 5471".

Good luck
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Old 17-02-2015, 16:12   #10
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Re: Tax Liability

My understanding of tax law would be that you would be required to claim the value of your use of the vessel as income on your tax returns. That would be say the cost of chartering a similar vessel. If you use a company car its considered as taxable income and must be reported.

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Old 17-02-2015, 17:09   #11
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Re: Tax Liability

Quote:
Originally Posted by OverboardDavid View Post
I'm not sure this is the right place to ask so apologies in advance if it isn't. Here's my question:

I've owned a catamaran for the last 8 years (US Built) that has been registered to a BVI corporation. It has been strictly used for personal use and over the 8 year period I've paid all taxes due. Recently, my accountant advised me that I should have been filing an IRS Form 5471 ("Information Return of U.S. Persons With Respect to Certain Foreign Corporations") reporting my ownership of the foreign company. Failure to file the form can result in enormous penalties should the IRS discover my ownership interest. Of course I knew that if I had a foreign bank account or other income producing assets, (I don't) a filing would be required. I never dreamed that the ownership of a family boat in a BVI Company would trigger a filing. It all gets very complicated and falls into a very arcane area of tax law. I'm wondering if someone on this forum has run into the issue and could refer me to a knowledgeable (and efficient) tax lawyer? Many thanks
Why not ask your accountant to recommend a tax lawyer?
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Old 17-02-2015, 17:12   #12
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Re: Tax Liability

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Originally Posted by rwidman View Post
Why not ask your accountant to recommend a tax lawyer?
Did you take a second home tax deduction?
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Old 17-02-2015, 18:12   #13
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Re: Tax Liability

Form US llc. and move foreign asset/corp into this entity.


All the Best
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Old 17-02-2015, 19:01   #14
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Re: Tax Liability

Some background on the CFC rules, in case helpful: The Controlled Foreign Corporation (CFC) rules are generally intended to prevent U.S. taxpayers (corporate or individual) from sheltering passive income (e.g. interest, dividends, cap gains) in offshore jurisdictions. The rules generally apply to foreign entities that are treated as corporations for U.S. tax purposes, and that are controlled by a small number of U.S. shareholders. Form 5471 is the form used to report an interest in a CFC and any related subpart F (e.g. passive) income of the corporation. If the CFC has passive income, the U.S. taxpayer has to pay tax on that income in the year it's earned (regardless of whether it's actually distributed). The penalties for failing to file can unfortunately be severe, and are not necessarily related to the tax due (though penalties can apply on that, too).

Would definitely suggest (as it seems is your intent) that you consult with a tax attorney who can give you customized tax advice based on your particular circumstances, and would, as someone else recommended, seek recommendations from your accountant. The big accounting firms all have tax controversy people that do this sort of work, but they will be pricey.
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Old 17-02-2015, 19:28   #15
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Re: Tax Liability

I am glad Im not American....
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