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Offshore banking: Is it legal or illegal?

On Behalf of | Nov 12, 2021 | FBAR & FATCA (Foreign Accounts), Tax Evasion

A bank account owned outside of one’s jurisdiction is referred to as an offshore bank account. Any citizen, poor or rich, can open a foreign bank account. The country hosting your offshore account is called a tax haven, meaning it levies lower taxes on you than your home country. This has led to evasion and avoidance of taxes by individuals and/or businesses.

We’ll examine the legality of offshore bank accounts, disclosure requirements to the IRS and the penalties for not disclosing information.

Are offshore accounts illegal?

A lot of information on the Internet or in the media can discourage you from going offshore. They relate the accounts to money laundering and tax fraud. Opening an offshore account is not criminal. It is only a crime when you fail to pay taxes or shield the accounts from the United States government. The government needs income to run its economy. Therefore, the Internal Revenue Service ensures every citizen pays their fair share in terms of tax.

It is unacceptable to hide funds in offshore bank accounts to avoid or evade taxes.

Is it a requirement to disclose foreign accounts?

The Bank Secrecy Act requires any person living in the U.S. to report the possession of foreign bank accounts to the Treasury Department through filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114. 

The FBAR includes monetary interest, signature or authority over at least one bank account located outside the U.S. if the accumulated value of the offshore accounts exceeds $ 10,000 at any period during the calendar year.  An FBAR report has to be filed on April 15, following the calendar year the report was made.  However, the report can be filed by October 15 if you don’t meet the April 15 due date. In case of a natural disaster, the IRS can extend the FBAR due date.

What is the penalty for not disclosing a foreign bank account?

Failure to file an FBAR can be either criminal, civil or both in some cases. Criminal penalties include failure to file an FBAR willingly. The penalty is up to $250,000, 5 years or both.

Also, if you are part of an illegal activity involving more than $10,000 in a period of 12 months or you fail to file an FBAR willingly while breaking another law in the U.S, you can be penalized up to $500,000, 10 years or both. The 2015 IRS guidelines state that the IRS can impose a  maximum amount of the civil FBAR penalty of not more than 100% of the highest amount in foreign accounts.

In case you convince the IRS that you did not willingly fail to report the FBAR, then the penalty will be limited to $10,000 per violation. 

 



 

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