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| Flags of Convenience |
Overseen Overseas
Michelle Seaton
06/15/2005
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Over the protests of people such as Heller, Congress passed the Illegal Immigration Reform & Immigrant Responsibility Act in 1996. Although the law has proven to have more bluster than bite, something substantive did emerge from congressional hearings on expatriation. Heller recalls that one lawyer in particular boasted of having set up hundreds of trusts for his clients who were considering giving up their citizenship. “Someone in the IRS took note of that number and found that there was no paperwork filed on any of those trusts,” he says. Consequently, the 1996 legislation included a new reporting regulation for grantors of foreign trusts. People who opened offshore trusts were required to file Form 3520 with their income taxes each year, listing the name of any foreign trust, any co-owners and the estimated value of the trust. “So people thought, ‘Well, I won’t file the form and if I get caught, I’ll just pay the fine,’” says Michael Chatzky, a partner in the La Jolla, Calif., firm of Chatzky and Associates, which specializes in asset protection services. He represents many clients who have—or had—offshore trusts. Prior to the 1996 legislation, failing to report an offshore trust carried a fine of $1,000 per offense. The new law imposed a much heftier penalty—35 percent of the assets in the offshore account. “Now I’m emphatic that my clients fill this form out in a timely manner,” Chatzky says. “It’s no longer a game of hide and seek; it’s a game of show and tell.”
Altering the rules of that one game changed the entire landscape of foreign asset protection. Perhaps the most important reason individuals had for protecting money in offshore trusts was to hide it from creditors—often either plaintiffs in multimillion dollar lawsuits or ex-spouses bearing court orders. Once the IRS could theoretically compel people to list their worldwide holdings for tax purposes, lawyers began to use this information as a tool in their litigation. “One of the first things a creditor will do is subpoena your tax records, and that’s a road map to your assets worldwide,” Adkisson says. That does not guarantee a creditor will get your tax records, but if he does, he can ask a judge for a repatriation order. Debtors who ignore this order could face a contempt of court charge and jail. In several precedent-setting cases, including the one involving Lawrence, judges have shown that they will cheerfully send individuals to prison until they repatriate their assets—no matter how long it takes.
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