Offshore banking is an appealing way to invest for many individuals. Despite common misconceptions fueled by the cinema, having an offshore bank account isn’t as scandalous as portrayed. On the contrary, offshore banking is completely legal – and oftentimes beneficial – if done the proper way.
Banks around the world are willing to start accounts for non-citizens. The World Trade Organization (WTO) and the Organization for Economic Cooperation and Development (OECD) requires participating banks to follow certain standards and rules. Some foreign banks choose to stay uninvolved due to the regulations.
Offshore bank accounts are legal. But trouble comes knocking when they are not maintained correctly.
File with the IRS
The key to avoiding conflict with the IRS is staying transparent. One of the worst things you can do is hide the fact that you have money in such accounts. Reporting your worldwide income on your U.S. income tax return is a requirement. In addition, you must disclose your interest in a foreign bank when asked. Even if that income is being taxed in a different country, the IRS should be informed.
Submit an FBAR
An FBAR, which stands for Report of Foreign Bank and Financial Accounts, must be filed annually. This is extremely important. Failure to file can result in civil penalties up to $10,000. If a false tax return is filed, the penalties increase, and jail time enters the picture.
Avoid common errors
Mistakes happen. Sometimes offshore account holders forget to file or miss the deadline. In this case, you need to file a delinquent FBAR and explain why you are filing late.
Offshore accounts are a legal way to invest, but maintaining the accounts require research and detailed upkeep. The treasury and the IRS run a tight ship. Regulations are modified constantly. If you are uncertain about filing or reporting offshore investments, it is wise to seek the help of a tax attorney before it’s too late.