Tag Archives: form 5471

Court Explains Offshore Company International Tax Plan

tax planning, saving taxes, how to save taxes, tax court

Tax Court explains great tax planning in this case.

This blog is about “Offshore Company International Tax Plan” approved by the the U.S. Tax Court.   The court’s  blueprint on offshore tax planning with a tax haven corporation will cut your tax burden in half.  

 In this Tax Court case, a private annuity was used to fund the foreign corporation.   The   corporation invested in publically traded stocks. 

A private annuity with a foreign corporation is a popular tax plan for the very rich.

What I like about the case, is that the IRS is the victor.  This means the IRS is not likely to disagree with its court victory

Offshore Company International Tax Plan with a Private Annuity

It works like this.  I form a BVI company with $10,000 as capital.    Then I fund my BVI corporation with an additional $90,000.  However, this time my corporation signs an agreement promising me an annual payment of $8,000 a year for the rest of my life or until I dissolve my corporation.    This arrangement is called a “private annuity.”

My BVI company earns $8,000 a year on its $100,000 (the $10,000 for the capital and the $90,000 for the private annuity).  It also deducts the $8,000 it pays me on the annuity,  leaving the corporation with no taxable income.   However, the annuity income tax rules, section 72, allocates $4,000 a year to my cost.  Of the $8,000 I received on the annuity, only $4,000 is taxable ($8,000 minus my allocated cost of $4,000).

I cast my tax planning is stone by filing IRS Form 5471.  Of course, I reference the IRS Tax Court case victory on the Form 5471. It is in this form that I report the activity of my offshore tax haven corporation.  As you may know, Congress enacted new laws to improve offshore corporations.  Here is a link with the basic.

Listen to our internet radio show, Tax Talk,  below (the show is about 15 minutes) to learn how to save taxes on your investment income with your controlled foreign corporation funded by your private annuity.  The term “private annuity”  means that no insurance company is involved.  Only you and your corporation are involved.  

Too busy to listen now? Ok.. then download the episode from our free Itunes page on this link.

Seemingly innocent but deadly to the IRS, private annuities have saved taxes since the beginning of the 1900’s.   But, now they are better.  The U.S. Tax Court agreed that private annuities paid by a tax haven corporation avoid all of nasty the anti-tax haven laws.

It gets better.  The IRS private  annuity interest rates are at an all-time low (about two percent).  This allows for income shifting to your offshore company.

Something as simple as your controlled foreign corporation funded with your money provides tax savings and asset protection beyond your wildest dreams (tax dreams that is).

The trick?   The trick, as you will learn on our internet radio show, Tax Talk (below), is the IRS’s information return, regulations and a recent Tax Court victory in  Dante and Sandi Perano, Petitioners vs. Commissioner of Internal Revenue.

Need Help with your Offshore Company International Tax Plan

If you need advice for your office company international tax plan, then contact me, Brian Dooley, CPA, MBT, at [email protected]

International Tax Accounting for Small Businesses

International tax accounting for the small business is unique.  Unlike a domestic business, the small business owning a foreign corporation or operating as a foreign corporation must maintain an double entry general ledger.

Double entry bookkeeping is much more accurate than using an excel sheet or a Quicken type software.  Along with the double entry general ledger, the international tax accounting includes “workpapers”.

Work papers support the balances shown on key accounts, such as cash in bank or inventory.

International tax accounting is needed for parts of the IRS form 1120F (the foreign corporation’s corporate income tax return) and form 5471 (the information return of the U.S. shareholder).

The form 1120F and the form 5471 have a balance sheet.  They also have a schedule where equity must be reconciled.  These items require a double general ledger.

With the GOP Tax Bill, keeping track of post 2018 equity is a must if you want to avoid taxes.  The GOP Tax Bill taxes pre-2018 equity.   You can learn more on this link.

International tax accounting to avoid the U.S. Branch Profits Tax

This is the most important reason for good and accurate international tax accounting.  The Branch Profits Tax is a 30% tax on the reduction or removal of equity.  If your bookkeeping is not double entry, you can easily pay the branch profits tax when it is not owed.

The Branch Profits Tax is on the Form 1120F.  It  has its own page.  It also applies to certain global interest expense.  The calculation of the tax is a complex equation.  It assumes that you  have double entry bookkeeping.

Without good international tax accounting, you are allowing the IRS to make a reason to tax your foreign corporation.  You must prove that you do not owe the tax.  Thus, you are going to need the double entry general ledger along with workpapers.

If you need help with your international tax accounting, the please contact me, Brian Dooley, CPA, MBT at [email protected]

New GOP Tax Savings in Preparing Form 5471 for the Controlled Foreign Corporation

The new  GOP tax bill has created new hidden tax savings.  While preparing Form 5471 for the Controlled Foreign Corporation, you want to make important elections.

Starting in 2018, Form 5471 is full of international tax planning and tax savings.  As you prepare Form 5471, carefully look at the instructions.  They hint at the hidden tax savings. (If this is the first year or a late filing, then please see this link.)

 It is here, in the fine but dull print, that you will find your tax savings.  Preparing Form 5471 for the Controlled Foreign Corporation is an art form.  

For example, did you know that an offshore corporation acting as a captive finance company can avoid U.S. taxes?  

Or that a foreign contract manufacturer related party sales are tax-free?

Or the special foreign investment fund (such as a foriegn ETF) and controlled foriegn corporation tax plan on this link.

Video on Preparing Form 5471 for the Controlled Foreign Corporation

The  video below is from an international tax class that I gave to the California Society of CPAs on preparing Form 5471 for the Controlled Foreign Corporation

If you want to start to save taxes while preparing your Form 5471, then contact me, Brian Dooley, CPA, MBT at [email protected]

IRS International Tax Audit and Voluntary Disclosures & How to Save Taxes

IRS International Tax Audit and Voluntary Disclosures are the two most important tax issues facing the global small business.

When you are audited by an IRS tax auditor, he (or she) is going to hunt for any type of unreported financial account or unreported foreign assets.   The IRS  wants penalities first and taxes second.

The form 5471 (the information return for a controlled foreign corporation) has many sub-schedules.  If you forget to include a sub-schedule not only do you get a tax penalty.   More importantly,  the IRS is allowed to audit the tax year involved at any time.

For example, the IRS International Tax Auditor examines your 2012 form 5471.  He finds that you did not complete Schedule O.  So, he checks your 2010 and 2011 form 5471.  And by golly, you did not complete Schedule O.

Since the tax returns for 2010 and 2011 were filed more than three years ago, you thought that the IRS could not examine those years.  Yes, that is the general rule.  However, when an IRS international form is not filed, the tax years remains open to examination forever.

IRS International Tax Audit and Voluntary Disclosures

When you discover a mistake on your IRS international tax filings, you can be pro-active or wait and see if the IRS audits you.

Pro-active has many advantages.  First, you will likely avoid tax penalities.  Next, you start the clock ticking as to how long the IRS has to audit your tax return.

Voluntary disclosures come with a high tax penalty (27.5 percent of the value of the non-reported foreign asset(s)) but with a great tax planning opportunity.

The voluntary disclosure program allows you to dissolve your foreign corporations without incurring tax on the dissolution.   Once the corporation is dissolved, you can re-design your international tax corporate structures.

Another advantage is avoid a nasty tax on what is known as a passive foreign investment company (PFIC).  Often the novice international tax planner will create a foreign holding company to own the shares of foreign subsidiaries.  

This is one of the worst structures because the holding company is a PFIC.

And there is another tax savings.  If you are invested in foreign funds, your tax rate is only 20% instead of the usually PFIC tax rate of 39%.

If you need help with your international tax issues, then contact me, Brian Dooley, CPA, MBT at [email protected]


Foreign Passive Investment Funds (PFIC) Tax Plan with a Controlled Foreign Corporation

The foreign passive investment funds (PFIC) controlled foreign corporation uses a little known law.  It is called the “overlap rule”.

Seems almost impossible when two anti-taxpayers international tax laws can save you taxes. This is what happens with the Congress does not understand basic accounting.    For every debit (which in accounting is a plus “+”) there is a credit (which is minus “-“),

This axiom is the foundation of all income tax loopholes because this tax is a tax on accounting income.

When a holding company owns investment funds,  U.S. tax law collapses.  A few years ago, Congress could leave well enough alone.  Instead, they enacted a vague law requiring the income under the passive foreign investment company (“PFIC”) tax law to be reported by the U.S. shareholder of a foreign holding company.

The most popular foreign investment funds have been the Vanguard Investment funds managed from Dublin, Ireland.   These funds fit the definition of a PFIC.

From “reporting” the tax law vaguely implies that the shareholder pays tax on the PFIC’s income (if any and this if any has it’s on tax planning on this link).

The U.S. shareholder has to IRS Forms to file.  They are Form 5471 and Form 8621.  These two forms don’t integrate with each other.

I talked to the IRS International attorney in charge of form 8621 and PFIC taxation regarding this.  He knew of the problem but had no plans to fix this.   And why?  My guess is that it can’t be fixed because the two tax laws do not integrate.

Thus, your international tax accountant has many options in your tax planning when he prepares your Form 5471 and Form 8621.  Too many for me to fit them all into a blog.  One option allows you to convert ordinary income (called Subpart F income) into long term capital gain income.

However, a video will help your the tax preparer of your Form 8621.  I used this video for my international tax class for the California Society of CPAs.  This means that unless you are an international tax  CPA, you will find it boring and while debit and credits are boring. they are the focal point of tax loopholes.

If you need help in preparing your Form 5471 or Form 8621, then contact  me Brian Dooley, CPA, MBT at [email protected]