There are a number of good reasons for U.S. investors or companies to venture offshore, as discussed in the free report Why Go Offshore?  (http://www.offshorepress.com/whyoffshore.htm )

But the U.S. tax rules relating to various offshore transactions are ambiguous, punitive and vague beyond belief.  Penalties for a mere failure to file a form on or before the due date are typically $10,000 for each late form. And these penalties can be imposed by the IRS regardless of whether any profit has been realized and regardless of whether all the offshore transactions have been reported on a U.S. income tax return. For more information about the potential penalties that can be imposed see, Penalties on the Delinquent Filing of International Tax Returns. (http://www.offshorepress.com/vkjcpa/penalties.htm )

Here is an example. A U.S. corporation is the 100% owner of a small foreign corporation. The U.S. corporation requests an automatic extension of time to file its corporate Form 1120 until September 15^th, which also extends the time required to file the Form 5471 for the foreign subsidiary.  Due to some unanticipated computer problems, the company files its Form 1120 a few days late. Since the company has a loss, there is no penalty for a late filing of the corporate income tax form. However, there is a potential penalty of $10,000 for a late filing of the Form 5471 for the foreign subsidiary – even though that subsidiary also has no profit. Taxpayers can request a waiver of such penalties for reasonable cause, but the waiver is entirely at the discretion of the IRS.

A failure to file a timely return for a foreign trust can cost the taxpayer 35% of the assets in the trust. A foreign trust return had close to $2.7 million in assets. The Form 3520-A return was due on March 15^th and it was sent it to the IRS on March 14^th, via the USPS, certified receipt. About a month later, the client received a notice from the IRS that he owed about $95,000 in a late filing penalty because the return was received five days after the due date. It took numerous letters to convince the IRS that the return had been mailed on time.

Problems associated with foreign mutual funds, known in the tax law as passive foreign investment companies (PFIC) can lead to obscene results, wherein the tax and penalties can exceed the total income and/or gains from the PFIC.  The reason is because gains from such funds are allocated to all of the years the fund has been owned. Then a tax is computed for each year based on the highest rate in the tax tables – without regard to the marginal tax bracket of the taxpayer. To add insult to injury, a non-deductible interest charge is added to the amount of tax and compounded on a daily basis. Because gains can not be reduced by losses, the tax and interest can easily exceed the total net gain from the investment. For more information on the U.S. tax treatment of U.S. investors in foreign mutual funds, see http://www.offshorepress.com/offshoretax/otpfic.htm

The U.S. tax system imposes a tax on the worldwide income of any U.S. citizen, permanent resident or any entity formed in the U.S. The U.S. system also taxes the U.S. owners of any foreign entities such as foreign trusts, foreign corporations and various foreign investments.  When income is earned or realized in a foreign country that imposes an income tax, the U.S. tax system permits taxpayers to claim a credit against their U.S. tax for the taxes paid to the foreign country.  But there are numerous restrictions and limitations on the foreign tax credit that are being changed nearly every year by the tax writing committees in the Congress.  An example of a limitation is that a U.S. corporation can claim a credit for foreign taxes paid by a foreign subsidiary. But if a foreign corporation is owned by an individual (or a partnership), the credit is not permitted. Another example is that if a value added tax is imposed on the profits earned in a foreign country, the VAT is not allowed as a credit against the U.S. taxes on the same income. Why? Because the VAT is not deemed to be an income tax.l

These are just a few of the many issues discussed in Offshore Tax Strategies, a 70 page plain English guide to the U.S. tax treatment of foreign investments, foreign earnings and foreign entities owned by U.S. persons.  The authors are Vernon Jacobs and Richard Duke. Jacobs is a CPA and the author of the Jacobs Report on International Financial Planning and numerous tax books. Duke is an international tax attorney and adjunct professor of international tax law and author of numerous technical guides on international taxation.

The book is available in printed form for $67 and as an e-book for $37. It is not available in bookstores but can purchased through the Offshore Press, Inc. web site at http://www.offshorepress.com/offshoretax/index.htm