An important ruling on foreign financial accounts

March 1, 2011
Tulum, Mexico

Last night my partner and I held our monthly subscribers-only teleconference for premium members, and one of the hot topics was the ambiguous nature of laws.

Everywhere in the world, laws are riddled with errors, discrepancies, omissions, and double think. Often these ambiguities are intentional– a result of political bargaining or lobbying to maintain a back-door loophole that only affects a small percentage of the population.

More often than not, though, the ambiguities are unintentional, derived from the haste and incompetence of lawmakers. Whatever the reason, there are some rules that are so opaque that legal volumes are filled with case studies and court interpretations.

US tax code and offshore regulations are great examples.  Current law requires US taxpayers to report ownership interest and signature authority over foreign financial accounts (“FFAs”) if the total value of those FFAs exceeds $10,000.

Seems clear, right? Wrong. There has been a lot of debate over the last few years about what specifically constitutes an FFA. This is an important distinction since, as you could imagine, the IRS can impose nasty penalties for not reporting.

Central to this issue are firms like GoldMoney which store precious metals on behalf of customers in exchange for fees or high purchase premiums. Do these constitute FFAs? It’s been unclear for quite some time.

On one hand, individuals who purchase precious metals through gold money are effectively making an investment, and the underlying asset is being held by a custodian overseas. This is similar to buying commodities or shares through a Swiss broker, a case which clearly meets the existing definition of an FFA.

On the other hand, since gold does not meet the standards of a monetary instrument as defined by the US government, paying a firm like GoldMoney to hold personal assets offshore is no different than paying fees to an overseas storage facility to stash your antique collection or extra bedroom set.

Well, the Financial Crimes Enforcement Division of the IRS has just issued a new interpretation of the regulations. Bottom line: GoldMoney counts. If another human being or firm takes charge of your gold and holds it in custody, this constitutes an FFA and triggers reporting requirements.

Bear in mind, the reporting requirements are simple: you tick a box on Schedule B of your 1040 when you file your taxes, and you fill out a separate form TDF 90-22.1 by June 30th annually which provides details on your FFAs for the previous year.

This recent ruling will apply retroactively to 2010, so if you had a GoldMoney account in 2010, you’ll need to fill out the forms this year.

It appears from this ruling that offshore safety deposit boxes that you control do not constitute FFAs, i.e. if you hold gold in a private vault in Switzerland, and that gold is technically controlled by you because you keep the key and vault code, this would not be an FFA.

Again, though, this issue is left a bit unclear. Go figure, when the bureaucrats try to clear up the regulatory ambiguities, they still leave plenty of holes.

On that note, I also find it ironic that the Financial Crimes Enforcement Network is the body that issued this ruling. It certainly begs the question what holding gold overseas has to do with financial crimes…

Sure, they always use drug trafficking, terror financing, and money laundering as an excuse for everything these days, but I think it’s an important indication that Uncle Sam is viewing anyone who doesn’t swallow their fiat lies hook, line, and sinker with a suspicious eye.

In any event, it’s good that there’s at least some clarity on the issue. Some people worry that having to disclose their financial details to the government means that their money isn’t safe, even overseas. They think that their home government will still be able to confiscate it if they file the reports.

I disagree with that logic. If you keep your money and your assets in your home country, there are armies of bureaucrats at the state/provincial and federal level who can freeze you out of your own accounts and confiscate assets whenever they want.

If your money is offshore, outside of their jurisdiction, they don’t have the authority. Anyone who will want to go after your offshore assets will have a series of insurmountable obstacles in front of them that span diplomatic, procedural, legal, and regulatory challenges.

In most cases, it’s just not worth it.

Let me put it to you this way… if a thief really, truly wanted to steal your car, s/he would be able to do it, right? So does this mean that you should never lock your car, hide valuables from plain sight, engage a car alarm, and use other security tools? Of course not.

Make it a bit more difficult for them, and the felons will move on to the easier targets.

In the meantime, all it takes for peace of mind is a few annual disclosures, and I have no doubt that it’s well worth it.