Having an offshore account is legal as long as the account holder follows the required disclosure and filing mandates outlined by the IRS. Foreign banks also require that their clients comply with the local and international tax laws to avoid litigation risks with foreign countries such as the United States.
Legitimate reasons for holding offshore accounts
Offshore accounts provide considerable convenience, especially for an individual running an international business. They provide easy access to cash, which facilitates international transactions. Offshore accounts also allow for international investment opportunities.
Perceived benefits of having offshore accounts
- Financial security: Many wealthy individuals in countries facing political and economic instability secure their money in foreign accounts to safeguard their future if the situation in their countries escalates.
- Increased opportunities to invest abroad: Individuals with offshore accounts can invest in various international money market funds to earn passive income.
- Currency hedging against a possible collapse of a country’s currency: Many people holding offshore accounts benefit if their home currency collapses. Their money retains its value considering it is saved in foreign currencies.
IRS and offshore accounts
In some cases, money deposited in offshore accounts is the product of fraudulent activities. It is often hidden to avoid seizure by local and international authorities. A U.S. citizen holding an offshore account must file the IRS FBAR form and report any bank balances exceeding $10,000. Failure to comply with IRS regulations regarding offshore accounts can lead to serious legal ramifications, including jail terms or hefty fines. It is classified as money laundering.
The IRS has partnered with the Department of Justice to identify U.S. citizens evading taxes. According to the Foreign Account Tax Compliance Act (FATCA), all banks globally are obliged to report the bank balances of any American citizens to the IRS or face legal action. This policy makes it difficult for any U.S. citizen to evade paying taxes. The IRS outlines several options for U.S. citizens to rectify undisclosed offshore accounts before legal action is taken against them. Individuals found guilty of tax evasion using hidden offshore accounts may wish to consult legal advisors on the best options provided by the IRS.
Those who fail to file taxes associated with offshore accounts are subject to severe penalties, including fines up to $10,000. An additional $10,000 will be fined every 30 days after the IRS gives notice regarding undisclosed offshore accounts. Subsequent criminal penalties may also apply depending on the IRS’ approach to the case.