The last few years have seen many claims by offshore physical precious dealers or structured programs that provide storage through a third party or an affiliated company whereby USA customers are told they do not have to report their precious metals because they are “held directly”.
These marketing gimmicks continue to claim and mislead US investors because the IRS says if assets are held “directly” US citizens are not required to report their offshore assets to the US Government through form 8938 or FBAR. These marketing statements are enormously misleading because the IRS actually states the following with regard to precious metals. (see asterisk)
The following are not considered financial accounts:
- A. Stocks, bonds, or similar financial instruments held directly by the person.
- B. Real estate or an account holding solely real estate (e.g., Mexican "fideicomiso" ).
- C. A safe deposit box.
Note: A reportable account may exist where the financial institution providing the safe deposit box has access to the contents and can dispose of the contents upon instruction from, or prearrangement with, the person.
- D. Precious metals, precious stones, or jewels held directly by the person.
- Note: 31 USC 5314 defines "foreign financial agency" as "a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold." Therefore, a reportable account relationship may exist where a foreign agency holds precious metals on deposit or provides insurance or other services as an agent of the person owning the precious metals.
The above section describes most foreign private vaults that also act as a dealer in the transaction. In addition, dealers may claim the metals are held in an allocated and segregated fashion. This is another red flag because metals can only be held either in an allocated or segregated fashion but not both.
The fines are very costly for US Investors
NonFiling form 8938
If you don't file a complete and correct Form 8938, there is an automatic $10,000 penalty that can grow to a $50,000 penalty if not dealt with immediately. You will be required to pay the regular tax that would have been due on these assets plus interest and incur an additional penalty of 40% of the tax due.
NonFiling the FBAR Form
The IRS states in the “IRS FBAR REFERENCE GUIDE” that “the largest civil penalty for a willful violation of the FBAR requirements is the greater of $124,588 or 50 percent of the balance in the account at the time of the violation. Non-willful violations can result in a penalty as high as $12,459 for each violation.
Holders of digital precious metals that may be backed by physical may also need to report their accounts to the IRS, even if the physical metals are stored by the offshore program within the USA. This is because the token is a representation of digital metal not actual. Actual metal is still held by the sponsor as part of a physical bar or until certain requirements are met.
If you are investing in or storing metals with a program that may be similar as mentioned above and have not filed, please contact your accountant or tax attorney to understand the potential liabilities. Remember most physical or digital programs are completely unregulated and have little oversight. The claims they make are to benefit themselves and not their clients. It is important as a US investor to protect your own interests and assume these programs are not providing any legal advice but rather simply trying to attract assets and revenue.
Please contact Bob Coleman with any questions or concerns.