Dick Adams <rdadams[at]smart.net)> wrote:
- quote -

That may be part of a black market exchange.

- quote -

I believe so.

- quote -

I don't know.

- quote -

How do you know that? Maybe it will be used on the black
market to buy a pair of blue jeans. (OK, maybe the guy who
sells blue jeans uses illegal drugs; but I wouldn't be
surprised if some of the executives of the corporation that
owns my local supermarket use illegal drugs, too, and that
certainly doesn't make me buying food there wrong.)

- quote -

That's why he should get receipts (and perhaps report the
transactions, if the cash amounts are large enough).

Seth

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""But I think you will have to give the "relative or
whoever" a 1099, and they will have to pay US taxes on it.""

If the work were done offshore, then the compensation for
such work is not US-source, in which case it is not subject
to tax by the U.S. unless the person performing the services
has an office or other fixed place of business in the U.S.
and that income can be attributed thereto under 864.

In terms of withholding & reporting, the issue gets a little
dodgier.

As to withholding:

First, since the work was performed offshore, the pay is
non-US-source, meaning that either (a) there is no
withholding obligation if the payee is foreign, but (b)
there may be wage withholding under 3401 if the payee is
treated as a U.S. person.

Here, in the absence of a Form W8-BEN, the payor would have
to treat the payment as being made to a U.S. person (and
thus subject to wage withholding), except that, if the
payor's communications with the payee are mailed to an
address in a foreign country, then the payor may presume
that the payee is foreign in the absence of a W8-BEN.

Here, provided that the payor sends some sort of official
work-related communications through the mail to a foreign
address, he should be able to presume that the payee is
foreign (which just makes sense - here the regs manage to
get, in a round-about way, to the sensible solution), and
that therefore there is no wage withholding.

The one wrinkle is the payment in the U.S. to a relative who
is physically present in the U.S. Such a payment would
generally be treated as being made to a U.S. person unless
the payor has actual knowledge that the beneficial owner is
a foreign person. Here, since the issue is actual knowledge
(and not presumptions in the absence of a W8-BEN), the payor
appears to have actual knowledge, and so can avoid the
presumption that payments in the U.S. to the rellies of his
foreign programmers are made to U.S. persons.

Reporting:

Here, we have a payment of non-US-source income to a
(presumptively) foreign payee. Thus, under Regs 1.6041-4
and 1.6041A-1, no reporting is required under Sec. 6041
because, even though this is a payment for services received
by a person in the course of his trade or business, no
reporting is required if the payee is presumptively foreign
(in effect, if it's a payment to a foreigner, then the Sec.
6041 rules defer to the Sec. 1441 rules).

Since no withholding is required under Sec. 1441 because
this is the payment of a foreign-source item to a
(presumptively) foreign payee, no reporting is required
under Sec. 1461 and Reg. 1.1461-1.

Thus, in the facts as given, provided that the payor
communicates by mail sent to the workers at a foreign
address, he can presume that they are foreigners for both
withholding and reporting requirements, and is not required
to either withhold on or report such payments.

As to deductibility, if the payments are otherwise ordinary
and necessary, and provided that adequate records are kept,
the mere transfer of cash to a middleman (aka "courier") to
carry overseas to the ultimate payee is not in itself
sufficient reason to render the payments nondeductible.

There is, however, the question of whether a payment in this
manner would be treated as an "other illegal payment" under
Sec. 162. I have no idea, however, whether there is any
federal or state law that would, without more, subject our
payor to either criminal penalties or the loss of a license
or permission to engage in his trade or business because
these payments were made in cash rather than by wire
transfer or cheque. I rather doubt it, however.

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"Seth Breidbart" <sethb[at]panix.com> wrote:
<snip
- quote -

No. However, you have to report it (e.g. via 1099), and they
have to report it (e.g. via 1040).

Additionally, if you pay over $10,000, there's this form:

http://www.fincen.gov/form8300dec2001.pdf

among other reporting requirements. The Patriot Act adds
some further requirements. Also, the banks which provide or
accept the cash have some reporting requirements as well.

And I don't know what the data sharing arrangements will be
with the foreign country in the originally posted case. But
it won't be a secret transfer.

- quote -

The Patriot Act. The Banking Secrecy Act. Aiding a tax
evasion scheme. And probably more if they think about it.

This is not legal advice and I am not a lawyer. YMMV.

Hank Murphy
speaking only for myself

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Playing Devil's Advocate, Seth wrote:
- quote -

Is there a reason to answer a rhetorical question.

- quote -

Is it illegal to send US currency to Cuba or North Korea?
What about Iran?

I know with certainty that India had a closed currency in
the 60's - but that is a long time ago. I had a student
who got a green card and was sending home $50 a week. He
said his father could sell that $50 for three times its
value in local currency. His father had never made that
much money in month.

What is needed here is a legal opinion from an attorney with
expertise in dealing with countries with closed currencies.

- quote -

Are you suggesting that the OP go ahead with these
transactions knowing the US currency will be used on the
black market to avoid local currency laws and eventually
wind up in the hands of drug dealers?

Lord help him if he accidently runs afoul of the money
laundering laws.

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Dick Adams <rdadams[at]smart.net> wrote:
- quote -

Is it against US law to pay somebody US cash for work?

It might violate his country's law for the US cash to be
smuggled in, but is it a violation of US law (for most
countries, not counting Cuba, North Korea, etc.)?

- quote -

Trial for what? Paying his contractors their wages?

Seth

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"NewYorker" <newyorker777[at]hotmail.com> wrote:

- quote -

By the time you are through with this, you may find that US
programmers are cheaper...

- quote -

You don't seem to want to mention the country.

And the reason that they do this is to...perhaps evade taxes
in their home country? If that country is a signer to a tax
treaty with the US, you have the risk that information might
be exchanged with the IRS, you might be indicted by the
foreign country, and the next time you travel outside the US
you might be held and extradited. Kind of an extreme
outcome, of course, but it's always easier for the
authorities to go after a little guy than after big
corporations. YMMV.

And you don't mention the form of the payment to the
"relative or whoever". Perhaps I'm just too suspicious, but
I'm guessing they will want cash. Then there are some
Treasury reporting forms. Which the DEA will find
interesting...as well as the Department of Homeland
Security...and perhaps even the IRS Criminal Investigation
Division. Kind of an extreme outcome, of course, but it's
always easier for the authorities to go after a little guy
than after big corporations. YMMV.

- quote -

It's difficult to answer this without knowing the details of
your situation. But I think you will have to give the
"relative or whoever" a 1099, and they will have to pay US
taxes on it. Of course, you could just slip them the money
under the table and run the risk of being wanted for aiding
tax evasion in *two* countries. YMMV.

As always, I am neither a lawyer nor an enrolled agent, and
this is not professional advice. I would seriously advise
you to seek help from a competent professional...a mental
health professional...because IMHO you would have to be
crazy to do this.

Truer words were never spoken,

Hank Murphy
speaking only for myself

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"NewYorker" <newyorker777[at]hotmail.com> wrote:

- quote -

This is not a new problem. It's the classic closed-currency
problem. A country with a closed-currency sets the rate of
exchange for US dollars, will exchange incoming US dollars,
but will not exchange their own currency into any foreign
currency. This means the the closed-currency has no value
in the global economy, i.e., it's worthless to drug dealers.
The result is the creation of a black market to facilitate
the exchange into US dollars.

Now you can pay these programmers through their banks using
their own currency. But, of course, they want to be paid
in US dollars. If $100 USD will convert into 100 xyz at the
bank, the black market value could be from 200 to 300 xyz.

If I correctly recall, all parties in a black market
exchange become parties to a felony conspiracy.

- quote -

It is possible if you keep detailed documentation. Get
receipts and keep excellent records of the names, addresses,
etc. of the programmers and of the couriers you used. Note:
the US Attorney will refer to those relatives as couriers at
the trial.

Dick

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I have a LLC located in US. I'm using some foreign
programmers for my project. The problem is, I can't
transfer the money thru a bank to those programmers. The
way of doing business with that country, most people do, is
to give US Dollar to relative or whoever going back to that
country.

Here's my question, can I still claim those wages as tax
deduction?

TIA.

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