International Business, Tax, Estate and Asset Preservation Planning


November 2013

Stephen A. Malley
Malley photo


Stephen A. Malley has for over 40 years specialized in the areas of international business, tax and finance, transnational estate, tax, and asset protection planning,  and pre-immigration and expatriation planning. Mr. Malley's  practice includes domestic and foreign licensing of intellectual property,  and  the formation of  captive liability insurance companies.


Clients include:


*U.S. companies with or developing foreign operations


*U.S. citizens with foreign assets or conducting business and investing overseas


*Foreign individuals with U.S. assets and/or U.S. business


*Domestic and transnational estate and asset protection planning

Learn more about Stephen A. Malley


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Prior Newsletters




The IRS has increased reporting requirements relating to overseas personal and business interests. It has also vastly and ominously increased its enforcement of civil and criminal penalties for failure to file required reports.


The Department of Justice, with the IRS, has aggressively pursued Swiss Banks and individuals who promoted "tax avoidance" to U.S. Citizens and Residents.  It is reported that over 40,000 U.S. taxpayers have taken advantage of the "amnesty" program, and that over $5 billion has been recovered in taxes and penalties. Now that the DOJ and the Swiss government have reached an agreement that will allow Swiss Banks to turn over the names of U.S. direct and indirect owners of financial accounts, it is reasonable to anticipate that many more people will try to take advantage of the current "amnesty" initiative which allows U.S. persons to come forward with undisclosed foreign accounts to pay the reduced but substantial penalties but avoid criminal prosecution.   There are few exceptions which may allow a further reduction in penalties.


There are many people caught in this web of pain who never intended to conceal foreign assets, and who were either unaware of required reporting, or who were incorrectly advised. For example, there is any number of "accidental" American Citizens who never lived in the U.S. but who had a U.S. parent.   The IRS is not giving any free passes regardless of innocent intentions, although in some, but few, situations lack of willful intent may reduce the penalty.


FATCA, or the Foreign Account Tax Compliant Act, delayed to 2014, will require foreign "financial institutions", a term broadly interpreted, to report the names of U.S. beneficial owners directly to the IRS.  Most European and some Asian Countries are also on the reporting bandwagon; Germany has negotiated reciprocal reporting arrangements with the U.S. and France is negotiating for the same. (Click here to see the attached Chart which purports to show the status of each Country negotiations with respect to FATCA.)


One result of FATCA and the very aggressive enforcement of existing reporting requirements is that many foreign banks do not want U.S individual or business customers.  At least a few Congressmen are concerned that FATCA may prove detrimental to U.S. business. In any case, this writer thinks FATCA is here to stay.


Primarily resulting from high taxes, pervasive and complex reporting requirements, and the "exit tax", the number of expatriations ( giving up Citizenship or the Green Card ) is exponentially up from a few years ago.  Indeed,  wealthier "long term" Green Card holders should be concerned as  they face the same exit tax as Citizens, on the market value of world-wide assets; (Click here to see my articles on expatriation issues).


There are a myriad of reporting forms for U.S. taxpayers, of which many people are understandably not aware. There are forms to be filed by foreigners with U.S. business interests as well.


Some forms duplicate others but must nevertheless be timely filed.  Following is a brief summary of only some of the more commonly required forms relating to foreign activity, and it is important that the instruction pages for each form be carefully reviewed, as well as interpretive IRS rulings.

  1. The FBAR (Foreign Bank Account Reporting) (FINCEN 114) to report any foreign "financial account" whether one has signatory control, constructive control, or is a beneficiary of the account.  The term "financial Account" is very broadly defined, including, for example, cash values in foreign life insurance policies and annuities.
  2. Form 3520 to report any interest, regardless of how remote, in foreign trusts and distributions received; this Form also covers gifts and bequests from foreign sources; (3520A is filed by foreign Trustees).
  3. Form 5471 to report interests or transactions with foreign corporations; this form covers many situations relating to foreign corporations, including acting as an Officer or Director if 10% of the corporation is owned by a U.S. person.
  4. Form 8865 reporting interests in foreign partnerships;
  5. Form 926 for transfers of property to a foreign corporation;
  6. Form 8938-and this relatively new form is a dilly-requires the reporting of foreign assets with very few exceptions.  Other forms to report the same assets may also be required, such as the FBAR. (Click here to see my article on this Form 8938 for a more detailed discussion).

A discussion of penalties assessed for the failure to file a specific form is beyond the scope of this letter, but just for an extreme example, the penalty for "willful" failure to file the FBAR can be 50% of the highest account balance and up to ten years in prison. The IRS is reportedly not waiving the minimum penalties of $10,000 for each applicable year, even if the taxpayer paid all taxes on income from the account.


The IRS has in recent years pushed for maximum civil if not criminal penalties.  There are many commentaries on this rather disturbing trend to demonize U.S. Citizens who have foreign interests, investments, accounts or foreign business activity.  Not all such persons intend to avoid U.S. taxes, but apparently the IRS presumption is otherwise.   


It is interesting to note that the U.S. ranks 6th in the "secrecy index" issued by The International Tax Justice  Network. This Group claims that the U.S. is a major tax haven because it provides tax-free treatment and various forms of secrecy for nonresident individuals, corporations and other entities; the U.S. exempts from tax some categories of income, including interest paid by banks and savings institutions to nonresident individuals or foreign corporations; interest on government debt and interest on some types of corporate debt. 


This article is a general overview of the complex issues discussed. This article is not a definitive discussion of the issues and subject matter and it is not intended to be legal advice.

Stephen A. Malley
A Professional Corporation


2013 Stephen A. Malley, J.D.