One of the most compelling motives people have to venture offshore is
the promise of much greater privacy.

But as I discuss the issue with clients and customers, I'm having to
explain that in some ways, going offshore can result in less privacy
rather than more.

The primary culprit is the requirement to disclose certain foreign
financial accounts to the Treasury Department each year. The reporting
form is TD F 90-22.1 - "Report of Foreign Bank and Financial
Accounts", which is often referred to as the FBAR form. U.S. persons
(including corporations, trusts and other entities) are required to
disclose any foreign financial accounts in which the person has a
beneficial interest or direct or indirect signature authority. The
report is required if the combined total of all foreign financial
accounts at any time in the calendar year exceeds US$10,000. The
report requires the filer to provide their name, address, date of
birth and taxpayer identification number, plus the name of the foreign
financial institution, the country in which the account is located,
the type of account and the account number -- for each account.

It would not be a serious privacy problem if this report were subject
to the same safeguards as tax return information. But the information
in this report is easily available to any law enforcement agency,
including the FBI, DEA, customs and (I'm told) even state and local law
enforcement. Consequently, it is much easier for an asset search
specialist to secure a copy of this information than to secure a copy
of an income tax return.

When venturing offshore, most foreign banks require a U.S. person or
company to establish a foreign trust, corporation, LLC or
International Business Company in order to open an account or to
purchase and sell any securities. Without advance tax planning, these
entities often result in less privacy because of the various
information returns that are required by the IRS.

A foreign trust requires more disclosure than a domestic trust. The
same is true of a foreign corporation, a foreign limited liability
company or a foreign partnership. By more disclosure, I mean that the
information returns for these foreign entities require more detailed
information than a comparable domestic information return.

Some people are attracted to the idea of being able to move money
offshore and hide the money in a chain of bearer share corporations
and trusts. That may be practical for relatively small amounts of
money, but it usually costs a lot more than the tax savings that can
be achieved. It's very difficult to accomplish when large amounts are
involved. In the event of a lawsuit, IRS audit or divorce, it's not
difficult for the plaintiff's representatives to locate clues to
missing assets.

The days when we could become a financial "cheshire cat" and just
slowly evaporate with our money are either gone or nearly gone. For
those who think about living an anonymous life on some remote island,
they need to think about whether it's worth leaving most of their
assets behind and giving up on collecting any pension or Social
Security benefits and being able to make a living without leaving a
financial footprint in the sand.

Vernon Jacobs
Copyright, 2008, All rights reserved
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Guide to Reporting Offshore Financial Accounts
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