Blog
A New Barrier to Offshore Asset Protection
December 16th, 2008
You most certainly have seen the ads and heard the promoters touting the incredible benefits of offshore asset protection: Privacy, anonymity - and the big one - no taxes ever.
But there is a wrinkle in all their chatter. Uncle Sam taxes U. S. citizens on their worldwide income. So in another one of those too good to be true scenarios, setting up offshore won’t get you off the hook for federal income and capital gains taxes.
Of course, this is not enough of a deterrence for some. They will listen to the promoter and not to their U.S. advisors, who the promoters successfully argue don’t “understand” the benefits of offshore strategies. The promoter will tell them once you are set up offshore there are no filing requirements ever again for U.S. taxation purposes.
This is not the case. And the failure to file the proper form has just gotten very expensive.
The form in question is I.R.S Form 5471. All U.S. citizens who have equity in, or a controlling interest in a Controlled Foreign Corporation (”CFC”) must file one. Most offshore asset protection promoters put their U.S. clients into entities that are considered CFCs.
As of January 1, 2009, the IRS will now assess an automatic penalty of $10,000 for each CFC filing that is missed. That is $10,000 for each entity in each year that is not filed.
So let’s review an example of what can and now does happen in the offshore world.
Joe listens to an offshore promoter in Nevis about the benefits of offshore asset protection. The promoter never mentions the need to file Form 5471 each year. Joe spends tens of thousands of dollars to set up five CFCs in 2009.
In 2012, the Nevis promoter’s mistress realized the promoter won’t leave his wife. She is spiteful and turns all of the promoter’s files in to the IRS. Very quickly, the IRS is calling on Joe demanding $200,000 in penalties for the five entities for which no Form 5471 was filed for four years. And that’s just the start. Joe will have penalties, interest and taxes due on all the income he made over those years.
If you think it is unlikely the IRS could ever receive information in such a way, think again. If it is not from the promoter’s mistress, it may be from your own spouse or mistress or other aggrieved party. The IRS counts on domestic troubles as one of its best sources of information. But even if your life is trouble-free you can count on the authorities to be monitoring your wiring instructions and banking activities for offshore violations. And with this new $10,000 automatic penalty they have ever more incentive to do so.
You can complain about Big Brother and Big Government if you want (and you should; it’s healthy and to be encouraged). But it is important to know that certain offshore promoters will never tell you about these crucial requirements, to your great financial detriment.
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Foreclosure Scams
December 1st, 2008
The increase in foreclosures has resulted, predictably, in a surge in the number of scamsters pretending to want to help homeowners in need. Here are some of the scams to be aware of:
- The Bailout: The homeowner is led to believe that by signing over title to the house he or she can remain as a renter and buy the house back over time. The terms of the buyback are impossible to meet and the homeowner loses possession. The scam artist ends up with the property.
- Equity Skimming: A “buyer” approaches you with an offer of help. He will pay off your mortgage but you must move out and deed the property to him. The buyer puts a tenant in the property and collects the rents. But he does not make any mortgage payments and allows the lender to foreclose.
- The Bait and Switch: Homeowners are led to believe that they are signing documents to bring the mortgage current. Instead, they are actually turning over their ownership of the property to the scam artist.
- High Powered Help: Companies promoted as heroes to homeowners charge large and excessive fees to save the property. They perform very little work and the home is lost anyway.
How do you avoid one of these scams?
First, never be pressured to sign a contract. Take your time. If it is such a good service they will offer it tomorrow, despite their pressure to sign today. Suggest that you must have your lawyer review it (even if you don’t have a lawyer). If the person says a lawyer wouldn’t understand this or wouldn’t approve of it - you know you are dealing with a scam artist.
Second, never sign away your ownership to the property. People who put you in this position are only maneuvering to take away your home.
Third, never make a mortgage payment to anyone but the lender. If the scam artist suggests that they will pay the mortgage be assured that they will not.
Fourth, do not sign any document with blanks or lines that are not filled in. Scamsters will later add language to your detriment.
Finally, always seek the counsel of a good, local lawyer. Their job is to protect you from ever being scammed in these ways. And in this current environment there are plenty of scams to know about and avoid.
The New Identity Theft Law: Will It Work?
November 20th, 2008
Identity theft is now a pandemic, and a scourge for its victims. Is the federal government finally ready to fight back?
The Identity Theft and Restitution Act of 2008 was recently signed into law by President Bush. The new law is supposed to make it easier for the government to convict those charged with pursuing computerized identity theft. Supporters tout this legislation as allowing federal prosecutors to be more aggressive in cracking down on identity theft cyber crime. But will it work to protect millions of future victims?
The new law provides for the following:
- Discarding the requirement that damage to a victim’s computer exceed $5,000 over a one year period before charges can be asserted for unauthorized access to a computer.
2. Eliminating the interstate jurisdictional requirement, thus allowing prosecution of those who steal personal information from a computer, even when the victim’s computer is located in the same state as the thief’s computer.
3. Allowing victims of identity theft to seek restitution for an amount equal to the value of the time reasonably spent to fix their problems.
4. Adding the charge of a conspiracy to commit cyber crimes. (The prior law only allowed for charges related to the actual crime, and made no provisions for conspiracy to commit the underlying charge.)
5. Adding the remedies of civil and criminal forfeiture to better allow federal prosecutors to combat cyber crime. Individuals found guilty of violating the act can be forced to forfeit both property used in commission of the cyber crime, as well as property obtained from any proceeds gained from the cyber crime.
6. Making it a felony to electronically damage ten or more computers no matter the value of the damage caused.
7. Making it a crime to threaten to steal or release information from an individual’s computer. (Prior law only permitted the prosecution of those who seek to extort companies or government agencies by explicitly threatening to shut down or damage a computer.)
It is intended that the new law will allow federal prosecutors to be much more aggressive in prosecuting identity theft criminals. Elimination of both the $5,000 damage requirement and the interstate jurisdictional requirement should make it easier for prosecutors to bring charges.
But will it really help?
The federal government has tried to keep up with identity theft for years with few results. If the feds are truly interested in stamping out the pandemic, it is with the enforcement of the laws, and not just new laws, that will turn the tide.
Still, there are encouraging signs that a wide ranging effort is being made. The IRS is helping out by allowing in this next year all but the last four digits of taxpayer ID numbers to be blocked out on 1099’s, W-2s, and other informational returns. There is privacy in that move.
But it is not over. Stay tuned for more on this battle.
Garrett Sutton, Esq.
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Palm Beach Businesses Still Moving and Shaking
October 22nd, 2008
I was a recent guest speaker at the Palm Beach Partners 2008 Partner Matchmaker Expo. My topic, of course, was building business credit, and I was pleased to join a panel with other experts who agreed how important it is for business owners to focus on strong business credit.
Suzanne Leeds runs Leeds Capital Solutions, a factoring firm, and she gave advice on using receivables to improve cash flow. (I was flattered when Suzanne told me that she had our Corporate Advantage CD and listened to it often! If you would like a complimentary copy, give the XBanker a call and they’ll be happy to pop one in the mail for you or get you a download link.)
Donald Nappi with Network Technology Solutions in Pompano Beach gave some great tips on financing computer equipment with business financing deals from Microsoft.
If you are in the West Florida area, I recommend you make sure you attend future events. And congrats to Shawn Lewis of Celsius Holdings for all his hard work organizing this successful event. Shawn told me he’s been successfully building his own business credit using our advice. We love success stories!
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Urge Your Vendors to Report Part II
October 8th, 2008
A few months ago, I reported on Experian’s effort to get companies to report business credit accounts to Experian. Now D&B is trying to make it easier for companies to report as well. They have launched a free service companies can use to report their accounts receivables to D&B from Quickbooks.
I can say from experience that in the past, reporting to D&B has been difficult and expensive. While I haven’t given this service a try, it sounds like it could be a very useful tool for business owners who want to report. Business owners who are trying to build business credit may want to urge their lenders and vendors to check it out.
The downside, of course, is the possibility that mistakes and false information may be reported. Without a law that gives business owners the right to view and dispute their credit information for free, it’s possible that one of your vendors or clients is reporting wrong payment info — and you don’t know it.
If you try out this service, I’d love to hear how it works for you!
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Things You Need to Know About Raising Money for Your Business
October 1st, 2008
Whether you have an established business in need of additional capital or are just starting out, you need to know about the benefits and limitations inherent in your financing options. The costs and risks involved in the first few years of operating a business may be frightening. Careful planning will help to reduce the risks. Facing realities about your business’s financing needs and diligently preparing your business plan will help you to overcome the costs involved. The investment community is not willing to grant loans or invest in your business unless you provide them with something worthwhile to invest in. The following considerations and suggestions will help you to gain the trust of investors and meet your business’s financial needs.
- Retain Accountant’s and Attorney’s services - Although the expense may seem burdensome at first, accountants’ and attorneys’ services will save you and your business money in the long run. The hourly rate of a competent advisor is little compared to the cost of losing your business or being held liable for the business’s mistakes. These advisors will help you to structure your business properly and take steps to help the business grow responsibly. Some accountants and attorneys even provide flexible payment options for young businesses.
- Establish the Necessary Structure - While many business entities are available that provide differing advantages, structural differences may affect your ability to obtain financing without losing control of your business. If you have any aspirations of developing your business into a publically traded entity, you will need to know about the structure of a C corporation. Before you approach your first investor, you need to decide the number of shares of stock to authorize, whether more than one class of stock will be necessary, and how many shares to retain yourself.
- Prepare Your Business Plan - The first step in your business’s search for financing, if not a preliminary step in creating your business, should be ensuring that you have developed your dream into a coherent, well-drafted business plan. Your business plan should provide potential investors with a comprehensive view of the structure of your business, your conclusions about the business, a realistic operating plan that you intend to abide by, potential risks the business may face, the position the business can pretty safely expect to be in over the next six months and over the next year, and possible the comments about your hopes for further developments. In addition to providing investors with valuable information, your business plan will cause you to focus your attention and force you to look at every opportunity and every risk that comes with it with a clear eye and a level head. Periodically updating your business plan will help you to gauge your progress and enhance your ability to make realistic predictions.
- Decide Between Loans and Equity Offers - Before considering financing, and possibly in the course of developing your business plan or through other research, you should gain an understanding of the costs involved in operating the business. Remember that many young businesses operate for at least three years without any profit. Unless you start your business with old money, you will need to explore the possibility of loans or raising money by selling partial ownership of your business in equity offerings. While loans may allow you to retain ownership and control of the business, often, institutional lenders will be hesitant to help finance a new business. Accordingly, the business may have to sell equity to meet its financing needs. Depending upon the business uses, this may be through the sale of shares of stock, membership interests, or partnership interests. In selling equity, you and your business must exercise care so as to prevent giving control of the business to investors and to ensure compliance with federal and state regulations affecting such sales.
- Differentiate Among Investors - Federal and state regulations affecting the sale of equity in businesses, generally referred to as securities regulations, differentiating among types of investors. Accordingly, in selling equity in the business, you and the business will need to differentiate between investors to ensure compliance with securities regulations. For most young companies, the investor of choice is an accredited investor. Generally, accredited investors have the financial resources and knowledge to rationally make business investments. Regardless of the type of investor involved, the business must make certain disclosures regarding the business’s financial resources and its business plan. Before accepting money from anyone, the business must know which type of investor it is dealing with, what the investor needs to make an informed decision, and which laws affect the transaction.
- Satisfy Continuing Obligations - Once the business obtains the initial financing it needs, it must manage its debts and obligations responsibly. As with a personal credit history, the business’s ability to satisfy creditors and manage its obligations may affect future financing options and prevent the business from being subjected to creditors’ lawsuits. Part of ensuring that the business will be able to satisfy its continuing obligations is ensuring that the business obtains sufficient financing from the start. By carefully and realistically planning for the business’s needs, you can help the business to achieve short-term and long-term financial stability.
Every business is unique. Your financing strategy should be based on your specific circumstances. However, success requires careful consideration of available alternatives. By considering your financing options and engaging in financial planning, you will ensure that you take advantage of available opportunities.
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Improve Your Cash Flow: Collect Debts You Are Owed
September 15th, 2008
Recently a friend called me about a debt she is owed. She operates a small business consulting firm and another small business owner stiffed her for about a grand. It’s not a huge amount of money, but collecting it would make a difference to her. (And since she provided the service, she should be able to collect.)
She was asking for my advice in collecting. An attorney was out of the question (too expensive - and the client is in a different state) and the collection agency she had contacted wasn’t interested in one small debt.
Here’s another option she might consider:
Dun & Bradstreet’s Debt Collection Services
Affordable Debt Collection Services
Their offerings include:
- DunsDemand Letter - send a “wake up call” to slow payers
- DunsDemand Letter Series - convey the seriousness of the delinquency and escalate the collection process by sending three letters
- Contingent Collection - an effective combination of DunsDemand Letters and telephone calls made by a professional collections agent
How it works:
DunsDemand Letters are sent within a 30 day period by Receivable Management Services, a D&B partner, on your behalf. These letters will be sent on RMS letterhead and will have a tear-off remittance included for your customers to mail their payments directly to you
Starting at just $25, these services aren’t expensive and might just do the trick. If your business is owed money, it might be worth a try.
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Does A Car Lease Affect My Credit?
September 12th, 2008
Here’s a question from a reader:
Does signing a car lease and making those payments impact personal credit in any way? The short answer is, “It may.”
If the car lease is a personal lease, and is reported to the credit reporting agencies (most are, but not all), it will affect your credit. Whether it helps or hurts depends on all the other information in your credit report. If you already have a lot of debt and payments, then it could be negative. If not, it may be a positive.
Even if the lease doesn’t impact your score much, it can affect your credit in other ways. I recall one entrepreneur, for example, who was charged a higher rate for her mortgage due to an expensive car lease payment that appeared on her credit report. Except it wasn’t hers. When she got it removed, her interest rate improved.
If the vehicle is leased under a business lease, and does not appear on your credit report, then it will not affect your personal credit.
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The Time Has Come To Fight Foreclosures
September 12th, 2008
In this difficult real estate market, many investors are advised to just turn in the keys and walk away from a property they can’t afford. The lender will sue for foreclosure, the borrower will not defend the case, and the property will be sold at a foreclosure sale.
In many states the lenders (or, in future years, those bottom feeders who buy such judgments for ten cents on the dollar) will pursue the borrower for a deficiency judgment. Meaning if you owed $400,000 back, you still owe $300,000. Years later you will still have someone chasing you for the money and your problems will continue long past turning in the keys on a failed investment.
It is now becoming clear that your best strategy is to fight a foreclosure. Hire an attorney to defend a foreclosure complaint. There are many defenses to be asserted, including a developing theory of predatory lending practices. As well, there are many appropriate procedural tactics which can be used to delay a foreclosure. When lenders run up against an aggressive defense, they are much more open to negotiating a settlement. They don’t want to spend a great deal of time or money on one case that has become a problem” for them. And as we know, they have a lot of cases to work on these days.
We are hearing of cases from around the country where lenders are becoming frustrated with defendant challenges to their foreclosure actions. Frequently, deals are struck whereby in exchange for the borrower allowing the foreclosure sale to proceed the lender agrees not to pursue a deficiency judgment and further agrees that the property value equaled the loan amount, thus avoiding the tax on forgiven debt. Borrowers are thus able to truly walk away from a property without the nagging concern of someone later pursuing a deficiency judgment or Uncle Sam later wanting money for debt forgiveness taxation. The attorney’s fees of between $2,000 to $5,000 in most cases are a small price to pay for getting clear of tens to hundreds of thousands of dollars in continuing obligations.
The time has come to stand up and fight foreclosures. Gain the leverage you need to release yourself from years of liability. Our office handles foreclosure matters in Nevada and California. In other states you will want to locate a competent real estate litigator in your area. Good luck.
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In Credit Crunch, Business Comes First
September 8th, 2008
Business owners are electing to pay business debts at the expense of personal debts, reports Experian(tm). In a comprehensive study covering 2.7 million business owners over the course of a year, the global information services company found that found that business owners with a severe mortgage delinquency were more likely to pay their business obligations instead of their mortgage.
Experian’s research showed that because of deteriorating equity, high mortgage payments and limited refinancing options, business owners chose to ensure the business’ survival, preserving their source of income at the risk of losing their home. That’s the bad news.
Here’s the good news:
Business owners were less likely to experience a 90+ day delinquency on their mortgage than other consumers. In fact, by April 2008, the average home owner was 1.5 times more likely to experience severe mortgage delinquency than the average business owner
Additionally, Experian’s study found that small-business owners are relying on commercial lending options more often than personal financing options, to support their businesses. We think that’s smart business and it may very well allow the business owner to keep their business even if they have to start over personally.
But of course, the downside is that business owners’ personal credit can impact their business financing. Experian, which sells a credit score that blends the business owner’s credit with the credit of the business, points out that consumer scores work great for assessing consumer risk, but their blended score performs nearly twice as well as a consumer score for assessing business risk.
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