I've been pre-occupied with getting some tax returns done before the
September 15th deadline (for corporations) and the October 15 deadline
(for individuals, partnerships and trusts). I'll be putting one more
tax return in the mail today and then I can resume my involvement with
this publication and updating some books and reports that I've had to
neglect for the last few months.

But before I forget the frustrations I've enjoyed this year, I'd like
to share a few observations with those of you who have an interest in
venturing offshore. Many of these issues will be discussed in more
depth at my CFC Tax Boot Camp in Las Vegas on Dec. 7th. (See
http://www.offshorepress.com/cfcworkshop.htm)

First of all, if you have a foreign corporation or a foreign LLC, it
will be treated by the IRS as a controlled foreign corporation unless
you make an election (Form 8832) to treat the foreign entity as either
a foreign partnership (more than one owner) or as a foreign
disregarded entity (one owner.) The election should be made within 75
days after forming the entity , but it is possible to make an election
before March 15th of the next year. If that second deadline is missed,
the only way to get out of the CFC tax treatment is to make a deemed
liquidation -- which might be a taxable event.

Second, if you form a foreign corporation or LLC and don't make an
election to be a pass-through entity, and receive business income but
then invest that money in various kinds of passive investments, the
investment income will become taxable but losses will not be
deductible. The business profits might be tax deferred, but there are
a LOT of hidden traps in the tax law that may cause all of the income
to become currently taxable.

Third, if you form a foreign corporation and then proceed to operate
the business from within the U.S., the IRS will treat that income as
U.S. source income. The foreign corporation will then have to file a
U.S. corporate tax return (Form 1120F) to pay taxes on the profits
generated from work done in the U.S.

Fourth, the time actually required to fill out one of the foreign
corporation tax forms is frequently only a small part of the total
time involved unless detailed U.S. GAAP financial statements have
been prepared by someone else. Most of the time that I end up spending
on a CFC or other foreign entity return is for what I regard as
accounting -- or getting the information organized so that all of the
necessary data is available to fill out the required forms. One of the
most time consuming parts of the work is to analyze the monthly
account statements from foreign banks. Analyzing foreign investment
transactions is usually far more time consuming than analyzing
business transactions, but I find that foreign accountants simply
don't comprehend the level of detail required by the IRS for various
tax information forms. If foreign financial data is based on a foreign
currency, it takes more time to convert the data to US$. And, in most
cases, the records will need to be modified to be consistent with U.S.
accounting procedures.

Fifth, the tax returns for foreign entities have to include a balance
sheet at the beginning and end of the year. Unlike a small business in
the U.S., a simple cash in and cash out method of accounting is not
enough. Whoever prepares the financial data needs to understand
accounting concepts like accrual accounting and debits and credits.
When a client gives me a checkbook or bank account statements, it
takes as much time as doing the bookkeeping for the entire year. The
more activity there is, the more time it takes.

When a client has investment transactions in multiple currencies, the
transactions need to be converted to US$ at the time of each
transaction. When a foreign business involves multiple currencies, the
different transactions have to be converted first to the functional
(primary) currency and then to US$.

I suspect that more than a few U.S. accountants would be delighted at
having to spend so much billable time doing the accounting analysis
and currency conversions. But I don't really get a kick out of what I
regard as basic bookkeeping and would much rather focus on the tax
issues than on constructing a balance sheet and income statement from
a hodge podge of financial records.

Speaking only for myself, my strong focus on international tax issues
for the past ten years has resulted in losing touch with a lot of the
U.S. tax issues that most U.S. accountants deal with every year.
Therefore, I will not agree to prepare a domestic tax return for a
business unless there is an understanding that I will need to spend
extra time reviewing a variety of tax code sections, regulations and
other sources of authority for transactions that I rarely encounter in
connection with preparing foreign information returns. My very strong
preference is to work as a preparer of the foreign information returns
that will be provided to a domestic tax preparer who will take care of
any domestic tax issues.

Having said that, I am NOT seeking more tax preparation work for
myself. I already have as much work lined up for 2007 as I want to do.
And I prefer to spend the majority of my working time on research,
writing, teaching and publishing. In spite of the extensive time I've
spent on tax work this year, it's also been a good year for my
publishing business (Offshore Press) and I want to build on that in 2007.

However, I'm a member of a small group of international tax
professionals called the International Tax Compliance Group. There are
currently four of us and we will soon be making very selective
invitations to some other international tax practitioners (both
lawyers and accountants) from small or solo firms to join our group.
Most of the inquiries that I may receive about tax compliance services
will be referred to various members of this group. For more
information about the ITCG, see http://www.itcgpros.com/

Vern