Offshore banking typically involves an individual opening up a bank account in a foreign country that they do not reside in. Many people tend to believe the reason for holding one of these accounts is to evade taxes or hides assets. However, in truth, there are a variety of reasons that people may want to open up such accounts. Individuals who are regularly traveling abroad for work, ex-pats or those planning to retire to another country can benefit from offshore banking.
Although offshore banking can provide many opportunities, there is quite a bit of confusion when it comes to the tax laws surrounding these bank accounts.
Is offshore banking illegal?
One of the most common misconceptions about offshore banking is that it is illegal. There is actually nothing illegal about creating an offshore account unless you open it with the intent of evading taxes.
Many people open up offshore banking accounts because they want to legally diversify their political risk by putting their savings into a well-capitalized and responsible institution that can best handle their money. Plus, these accounts often pay significantly higher interest rates than what you may find at home.
How to stay compliant with your offshore accounts
Taxpayers in the United States have an obligation to report their interest in any foreign financial accounts. This means that if at any point during the year the taxpayer has an aggregate balance that exceeds $10,000, they need to file a Foreign Bank Account Report (FBAR).
Even though this report is a legal requirement, many taxpayers fail to file it. This is often because they are either unaware of the laws or believe that these rules do not apply to them. As a result, these taxpayers are often left dealing with numerous legal issues and extensive fines.
For these reasons, if you have any offshore financial accounts, you should consult with an experienced tax attorney — especially if you have any undisclosed accounts. These lawyers can promptly review your situation, figure out your risk exposure, and determine the best course of action to pursue to minimize risk.