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Surprise: Foreign Deals Can Come With US Taxes

Monika Gonzalez Mesa, Daily Business Review

January 11, 2016

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South Florida’s multinational population means many U.S. nationals in the region have assets in foreign countries, but many don’t realize their overseas income is subject to U.S. income taxes, financial advisers say.

New residents are often surprised how quickly their tax obligations begin, and Venezuelans have the added disadvantage of exchange rate complications.

“As soon as you have been here 183 days in your first calendar year, you are subject to U.S. tax filings on your global taxable income regardless of where it arises,” said Michael A. Silva, an international tax partner at DLA Piper in Miami. “You can be subject to the U.S. global tax regime … even persons that stay here without lawful immigration status.”

Visitors on student visas, government workers and diplomats are excluded, he said.

Because the U.S. Treasury Department has been demanding more disclosure from foreign banks over the last several years, people with foreign income are more likely to be caught and face heavy fines.

“The old days of bank secrecy don’t really exist anymore,” said Alan L. Weisberg, a tax attorney, former federal prosecutor and managing partner of Weisberg Kainen Mark in Miami. “When this program started, Swiss bankers were telling my clients, ‘Don’t go into voluntary disclosure. The Swiss government will never authorize the disclosure of secret information.’ Now, not only are they doing it, but the banks are encouraging clients to go into voluntary disclosure because the banks want to avoid being penalized or indicted.”

In the wake of criminal cases targeting UBS, its bankers and customers starting in 2009, voluntary disclosure programs granting partial amnesty for undisclosed offshore income have grown popular.

2013 ALW Photo“The U.S. is one of about three countries in the world that taxes worldwide income no matter where in the world you live,” said Fort Lauderdale tax litigator Jeffrey Neiman, the lead prosecutor in the UBS cases. “For the South Americans and people from the U.K. countries, the U.S. taxing system is literally foreign and overwhelmingly different from what they were educated on, what their prior experiences were and what they are used to. We have clients on every continent but Antarctica who are caught up in this mess.”

If, for instance, someone sells their home abroad before coming to the U.S. and puts that money in a bank account at home, they have to disclose the account and any interest income collected on it. If they put their old house up for rent, the income is taxable in the U.S. If they haven’t reported, they can in some cases qualify for the voluntary disclosure program that offers reduced penalties and allows them to avoid criminal prosecution.

In either case, a portion of the penalty is based on the value of the asset with unreported income.

A dual citizen is required to pay income taxes in both countries, although they may get a tax credit for taxes paid in one of the countries.

Tax Nightmares

For many Latin Americans who have seen recent currency devaluations, the tax implications seem enormous, Weisberg said.

For example, in Venezuela the government has a three-tiered official exchange rate that varies with the type of product to be purchased. For imports of necessities including food and medicine, the official exchange rate is strongest at 6.3 bolivars to the $1. Other official exchange rates fetch either just over twice and more than 30 times as many bolivars.

The black market rate is a fourth rate that varies with demand and is not subject to government control. That’s the one most people use to buy and sell their homes even though the Venezuelan government doesn’t recognize it as valid, financial advisers say.

On Friday, the black market rate was 711 bolivars to the dollar, according to the most widely used rate reference in Venezuela. That means a $100,000 house would cost 630,000 bolivars on the official exchange rate but more than 71 million bolivars in a black-market transaction. If the U.S. uses Venezuela’s official exchange rate to calculate federal income tax, the $100,000 house would appear to be worth nearly $11.3 million. The tax bill can vary just as wildly.

The sale produces an inflated tax bill compared to what the taxpayer collects, said Neiman, a partner at Marcus Neiman & Rashbaum. The exact figure will vary depending on total income, depreciation, the use of the property and any expenses associated with the property.

“In general, you have to use [a rate] that’s been substantiated by a legitimate exchange,” according to Internal Revenue Service spokesman Dean J. Patterson in Washington. “You can’t just make it up.”

If there is more than one exchange rate, the IRS allows taxpayers to use the one that most properly reflects their income. If they take a loss on the exchange, that can be reported as well.

The black market rate is routinely used in commercial and real estate deals, according to a Miami financial adviser who was a banker and registered stock adviser in Venezuela, speaking on condition of anonymity. The trouble is many people don’t know they should document the exchange rate differences and capital gains at the time of sale, the financial adviser said.

He said he usually recommends his clients sell major assets before they move to the U.S. so that they don’t have to deal with the tax issues. He said banks also have procedures for selling gold and securities in one currency and immediately reselling them in another.

Sometimes failing to report overseas income occurs with the migratory pattern in reverse, Weisberg said. If people were born in the U.S. or became naturalized citizens during their stay, they are liable for U.S. income tax on their future income abroad, Weisberg said, although allowances are made including credit for paid foreign taxes.

“They don’t necessarily know that they are supposed to pay income taxes for the rest of their life once they go back,” Weisberg said. “They may live and work in the other country. They have no idea that they are supposed to be paying taxes. It happens more than you might think.”

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Written by Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL is a Miami-based law firm focused on providing comprehensive legal support to individuals and corporate entities caught up in tax controversies or charged with a criminal act. As experienced trial lawyers with a passion for justice, our firm provides clients with compelling advocacy, attorney availability, and creative solutions to your tax or criminal law matters.