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Offshore banking: What is it, how does it work, and is it illegal?

On Behalf of | Nov 30, 2020 | Uncategorized

Many people may have heard of offshore banking, but fewer individuals know the specific details of this type of foreign account. In fact, very few people even realize that there are numerous legitimate reasons to have an offshore bank account.

If you are considering an offshore account, it’s essential to understand how it works, the advantages of an offshore account, and the regulatory considerations necessary for its legality. 

What is offshore banking?

Offshore banking involves a bank account that you have in a country outside of your primary residence. These bank accounts allow you to hold money, receive payments, and set up investments and savings accounts in multiple currencies. 

A common misconception with offshore banking is that it is illegal and that individuals only use it to hide funds in bank accounts located in distant locations or countries. However, this is far from the truth. Using the services of a bank that is outside of the United States is not illegal. Doing business “offshore” can be as simple as driving a short distance to Canada.

Why use an offshore banking account? 

Offshore banking accounts are incredibly beneficial if you need to make or receive international payments or transfers regularly. These accounts can also make it easier to manage financial commitments across numerous regions or countries. They are also common amongst ex-pats who have bank accounts in the country they live in as well as their home country. 

According to international bank leader HSBC, most users of offshore bank accounts fall into one of the below categories:

  • If an individual is living abroad
  • If an individual is working abroad
  • If an individual is frequently traveling to other countries
  • If an individual is planning to move overseas when they retire
  • If an individual is getting paid in a foreign currency
  • If an individual owns assets, investments, or property in a different country
  • If an individual has family in another country that they support financially

Legality and tax crimes of offshore banking

There is nothing wrong or illegal about establishing or using an offshore account unless you are doing it with the intent to evade your taxes. Many people enjoy offshore banking because they provide a tax-efficient way to invest and save money. However, it is also essential to understand that as an American citizen, if you have an offshore banking account, you are required to disclose this income to any relevant tax authorities and declare any interest you earn on these accounts.

The Foreign Account Tax Compliance Act (FATCA) requires international banks to maintain records of American citizens’ accounts, making information like accrued balances available to the Internal Revenue Service upon request. The exchange of information between FATCA and the IRS may not necessarily occur with the account holder’s acknowledgment, particularly if fraudulent behavior or tax evasion is suspected. If the IRS believes that an offshore violation occurred and it was intentional and willful, it can result in a criminal investigation that can lead to an indictment for tax evasion.

Offshore banking may be a legitimate, strategic decision for a variety of reasons; however, the rules and regulations for offshore banking can be tricky. If you are not clear about the tax liabilities and tax regulations involved with offshore accounts, you may face significant challenges if your accounts are misused. In these cases, seeking a tax attorney’s advice can help you understand how to manage these accounts and stay in compliance.


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