Dangerous Tax Myths

Monday, November 20, 2006
Vol. 8 No. 231

In Today's Letter:
Comment: Dangerous Tax Myths
Offshore: Austria for the Rich
Wealth: Dollar Warning?

Dangerous Myths: What You Really
Have to Tell the Tax Man

Today's comment is by Mark Nestmann, Wealth Preservation & Tax Consultant for The Sovereign Society, and President of The Nestmann Group.

Dear A-Letter Reader:

I've just returned to Phoenix from The Sovereign Society's Offshore Advantage Seminar in Puerto Vallarta, Mexico...billed as "A Beginner's Guide to the Offshore World."

Of course, not everyone attending this seminar was a beginner. But many were, and of those beginners, a significant number believed dangerous myths about how the United States taxes offshore investments.

The fact is that the Uncle Sam taxes every American citizen on their worldwide income, no matter where they live or for how long. Virtually every other country in the world, except for Eritrea and the Philippines, taxes their residents...but not citizens residing abroad.

Lots of people, including me, think this is unfair.

Nonetheless, "facts are facts," and those of us who are U.S. citizens must deal with the realities of how our country taxes us, domestically and offshore.

Over the years, I've met many individuals who have committed some serious tax mistakes because they just didn't know any better. Quite a few haven't lived in the U.S. for decades and simply had no idea that they still needed to pay U.S. taxes. They didn't understand that they needed to file a U.S. tax return, every single year, on their foreign earned income. And I've advised quite a few that they needed to report their foreign bank accounts and their interests in foreign corporations annually as well.

If you ignore (or simply don't know about) these reporting requirements, you could face serious repercussions. If you add up the maximum criminal penalties for non-compliance with these mandatory reporting rules, you could face years in prison, and millions of dollars in fines. For instance, the penalty for a U.S. citizen to not report a foreign bank account, for just one year, is a five-year prison term and a US$250,000 fine.

What breaks my heart is that many of these misguided individuals never dreamed they had any tax obligations in the United States because they no longer live here. Simply moving yourself or your assets offshore doesn't disconnect you from the U.S. tax system.

If you're in this situation, you can become compliant with U.S. tax and reporting obligations by hiring a U.S. tax attorney who could prepare and file the necessary forms and tax returns. The cost of doing so could be tens of thousands of dollars (but well worth it, if you consider the alternative). It's also quite possible that if you did take this step, before any investigation was initiated, there would be no criminal penalties imposed. But if you fail to become compliant, the next time you travel to the United States, you could be pulled out of the line going through Customs and whisked off to an IRS office for interrogation and eventual arrest.

There are many advantages to going offshore as the attendees in Puerto Vallarta learned-among them asset protection, financial privacy, and access to lucrative, global investments that are off the radar of your U.S. broker or money manager. But only rarely are there tax advantages for a U.S. person offshore. And if you do choose to go offshore as a U.S. citizen, there are numerous tax and reporting obligations that you must adhere to.

Moral of this cautionary tale: it's dangerous to assume you're in full tax compliance. Always consult with a U.S. tax attorney just to be safe.

MARK NESTMANN, Wealth Preservation & Tax Consultant
Phoenix, AZ
assetpro@nestmann.com
www.nestmann.com

EDITOR'S NOTE: Don't fall for these dangerous tax myths! Listen to Mark's tax tips by pre-ordering the 2006 Offshore Advantage Seminar audio. It could save you hundreds of thousands of dollars in fines. Click here for more information.

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Offshore

Austria for the Rich

Vienna: Europe's rich and famous have found Austria to be a convenient place to park their fortunes. The country of eight million now hosts more than 3,300 super-rich individuals, and private assets in Austria are estimated around 580 billion euro (729 billion U.S. dollars). Many hail from Germany, with others coming from the Netherlands, Britain and the United States. Tax on assets is among the lowest in Europe. Only 1.3% of the total taxes Austrians pay are taxed on assets, compared with Britain, for example, where the respective share is 11.9%. In Austria, earning a fortune comes with a very high tax burden, but passing it on costs very little because of very low inheritance taxes and low taxation of private foundations. By setting up a foundation to benefit the family, payment of inheritance taxes can be avoided, too, because Austria's domestic and international investment earnings are free of taxation.

BOB BAUMAN, Editor

LINK: http://rawstory.com/news/

Wealth/Investments

A New Dollar Warning?

Two of the most influential government officials over the last 26 years recently warned about the future of the U.S. dollar. I think it's worth heeding their warning.

At a dinner in New York for the Concord Coalition, former Federal Reserve chairman, Paul Volcker and former U.S. Treasury Secretary, Robert Rubin, both warned about an impending funding crisis in the United States unless the government addressed its bulging deficits.

The Federal Reserve's Dollar Index has declined 27% since December 2001, a month prior to the dollar's secular peak. From 1995 to 2001, the dollar enjoyed big double-digit gains against most foreign currencies on the heels of rapid economic growth, productivity gains and budget surpluses under Rubin and Clinton. But that bull market came to a crashing end almost five years ago. The dollar has since managed to recover part of its bear-market losses, but remains well in the red versus the euro, Swiss franc, and the Canadian dollar. And the best-performing currency versus the sad dollar over the last three years lies in Latin America -- the Brazilian real.

"It's incredible people have gone on so long holding dollars," Volcker said. "At some point, you will get a situation where people have had enough." Volcker is a pretty smart guy. He managed to wrestle runaway inflation, which peaked at 20% in March 1980 down to 3.8% by December 1982.

The warnings have merit because massive government expenses associated with public funding will all come home to roost in less than a decade. Combined with interest payments, Social Security, Medicare and Medicaid will absorb almost 75% of government revenue by 2016 from 57% in 2005, according to the Concord Coalition.

The day of financial reckoning for the U.S. dollar and her capital markets is still a few years away. That's because interest rates are still low enough to make interest payments relatively affordable without inviting hyper-inflation to finance growing deficits. Also, a game of chicken currently exists between Asia and the United States; America buys Asia's goods and countries like China and Japan lend the United States dollars through the Treasury market. But at some point, the party will end as foreign investors, especially Asian lenders, call in their chips.

And don't think international markets will hedge your dollar risk, either. A funding crisis in the United States will spillover to all foreign markets causing absolute chaos. The best safe-havens include strong foreign currencies, high quality foreign bonds, commodities and my favorite currency hedge in the world -- gold.

ERIC ROSEMAN, Investment Director

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