A Lower Tax Profile for the Affluent

The IRS is developing a program to target what they call high net worth (HNW) taxpayers who have any form of foreign financial involvement for more intensive scrutiny. Since they don't currently have much information about net worth, what they are really targeting are taxpayers with a high income level. There isn't any information available about where the dividing line is, but it would be safe to assume that it will be somewhere above $250,000 a year of total income on page one of the Form 1040.

These audits will inevitably begin with a review of two or three years tax returns and the foreign bank account reporting (FBAR) forms. Laws that are currently being proposed may eventually require an annual disclosure of foreign based assets in addition to bank and financial accounts. If those laws are passed, the reports that are likely to be required will certainly be reviewed along with data in the IRS computer databases.

Once upon a time, moving assets offshore was a way to secure greater privacy from prying eyes. To a limited extent that may still be true with respect to non-government snoops -- such as lawyers who are contemplating whether to pursue some litigation on a contingent fee basis. But for the prying eyes of the U.S. government, greater privacy is now available within the U.S. Moving assets offshore is no longer an effective way to secure greater privacy and tax savings.

To minimize the potential for time consuming and potentially costly audits that are looking for unreported income from foreign investments, one solution is to reduce the level of foreign based assets to fall under the reporting thresh-hold. There is presently an exemption from reporting foreign bank and financial accounts that total $10,000 or less at any time during the calendar year. A husband and wife could each have somewhat less than that amount in an offshore account without having to file the FBAR form. The proposed law calls for a reporting thresh-hold of $50,000 of non-financial assets. And, it does not seem that direct ownership of foreign real estate must be reported. Storing collectibles in an offshore vault may also be exempt from reporting if access to the vault requires the presence of the depositor or an agent other than an official of the storage facility.

Another way to maintain a lower profile is to find ways to accumulate income in tax deferred arrangements and to consume after tax assets for necessary living expenses. For a very simple example, otherwise taxable interest income could be replaced with a tax deferred annuity. Then assets otherwise used to generate investment income could provide the cash needed for living expenses. Another tactic is to invest otherwise income generating assets in a variable life insurance policy and to use policy loans for some living expenses. For some taxpayers, these tactics will also reduce the potential for having to pay income taxes on some Social Security benefits. Other ways to minimize the income that is reported on a tax return depends on the specific facts and circumstances of each taxpayer. And in some cases, it is not feasible to avoid reporting a large amount of taxable income. But anything that can be done legally to defer income will usually decrease the potential for an intrusive audit or review of the income and assets of a high net worth (aka income) taxpayer.

Some additional tax saving ideas are available at http://www.vernonjacobs.com/ and my book on Legal Ways to Save Taxes Offshore and Onshore has about 100 different ideas for ways to reduce the tax bite and potential exposure to intrusive audits.

My book on the FBAR report is presently the most comprehensive source of information available about what must be reported and what the exceptions are.

Vern

http://www.offshorepress.com/legalways2save.htm

http://www.offshorepress.com/fbar.htm