Hypothetical Success Story *
Love letters from the IRS
Swiss Tax Worries
Primary Goal
Resolve Swiss and US trust related tax issues
The Background
Jake, 56 and Laura, 54 are hypothetical clients* who moved to Switzerland in 1990 to work as educators for in an international school. They expected to spend two years in Switzerland, but twenty years later, they have decided to become Swiss citizens and retire in the Valais. The Rogers do not have any children.
Three years ago, Jake’s mother passed away in Florida, and her assets, including some rental property and investments, were moved into a US trust, of which Jake was one of the beneficiaries.
During the first two years, Jake received small income distributions from the trust and reported them in his US income tax return. Last year, the rental properties were finally sold and Jake received a large distribution from the trust and the trust was dissolved. Believing that the sales from the homes were not taxable and that the trust was dissolved, Jake did not report the trust final distribution in his US tax return.
Jake and Laura consulted a Swiss friend, who is an attorney, about the trust. Their friend told that there are no trusts in Switzerland and that money received was considered in inheritance that didn’t need to be reported.
This year, Jake received a notice of deficiency from the IRS for failure to report the final trust distribution. Jake and Laura decided to look for an advisor who could help them respond to the IRS notice and review their US and Swiss tax situation to make sure there were no other errors that may need to be corrected.
The Challenges
- The believed that because they were educators, their tax situation was “simple”. How difficult can taxes be, after all?
- Jake and Laura also believed that they could not afford professional advice and relied on internet searches and friends for guidance on financial related matters.
- They had always self-prepared their Swiss and US tax returns.
- Unaware of the nuances, they made a few reporting errors on their Swiss and US taxes, underreporting assets and income both countries.
- They applied for Swiss citizenship without professional assistance.
- Becoming aware of the error identified in the IRS letter and other errors as they reviewed their past filings, they became concerned about the potential implications on their Swiss citizenship application and about how to best respond to their IRS notice.
- They worried about the impact of potential penalties on their upcoming retirement.
Approach & Results
We met with Jake and Laura to discuss their immediate concerns, the US inheritance, the IRS notice and their US and Swiss tax filings. During the discovery meeting we learned about their Swiss citizenship application and their desire to retire in Switzerland.
After discussing the appropriate scope of the project, we mutually agreed to expand the scope from the initial US tax review to also include a Swiss tax review, Swiss naturalization planning and to evaluate the viability of retiring in Switzerland.
Jake and Laura had made several mistakes over the years in their US and Swiss tax filings. They did not fully understand the estate implications of becoming Swiss citizens and didn’t know what to do about the proceeds from the final trust distribution. It was still sitting in cash, paying no interest in a US bank account. We helped them address the following issues:
- Resolve the IRS non-compliance by amending their prior year US tax return.
- Educated Jake and Laura on US offshore asset reporting and Swiss wealth tax obligations.
- Coordinated a voluntary Swiss Amnesty Program submission with a Swiss tax attorney to rectify Jake’s failure to report his interest in the US trust and the subsequent distributions, which were taxable for Swiss wealth tax purposes.
- Prepare an IRS submission under the Streamlined Offshore Filing Procedures to rectify their Swiss Pillar 2 and Pillar 3 reporting omissions and correct some other minor reporting errors.
- Introduced them to a Swiss estate attorney for assistance with a Swiss marriage contract.
- Reviewed their total wealth picture and developed a retirement plan that allowed them to retire in Switzerland.
- Invested the US inheritance in a portfolio consistent with their risk tolerance and income needs to supplement the fixed income from their Swiss pensions.
Jake and Laura realized that despite careful research, they had missed a few reporting requirements and had made tax errors that could have resulted in large penalties and could have negatively impacted their Swiss citizenship application.
Having realized the value of competent US-Swiss crossborder advice, Jake and Laura continue to work with Swiss American Wealth Advisors. They appreciate relying us to manage Jake’s US inheritance, our coordinated approach that considers the composition of their entire wealth, and their Swiss franc income needs.
We coordinate the preparation of their US and Swiss tax returns annually and help them maintain an overall tax and risk efficient US-Swiss cross-border retirement portfolio.
