Depositing money in a bank in a foreign country is not illegal. Some people may prefer to use offshore accounts for various reasons. However, the Foreign Accounts Tax Compliance Act requires all foreign entities to report on foreign assets held by U.S. citizens.
Your deposits will be regulated based on several factors. The bank’s account management policies will determine how your deposit is treated, and the country where the bank is located will indirectly regulate your money. International bodies such as the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) depend on agreements with the U.S.
Reasons for offshore accounts
There are legitimate, legal reasons why you may use a foreign bank account for deposits. You may enjoy lower tax rates in other countries by making deposits there and not in the U.S.
Illegal uses of foreign accounts include hiding funds and accounts for tax evasion. It is also unlawful to hide accounts with money acquired from criminal activities. Notably, some tax havens are inconsistent with IRS account disclosure purposes. Violating the rules may result in serious civil and criminal charges.
Furthermore, tax havens are an excellent way to shield your income from possible economic uncertainty in the U.S. Also, you can enjoy tax-free capital gains in some tax havens. Foreign accounts may be the best way to manage a sovereign investment.
U.S. citizens are required to uphold tax filing obligations, including Foreign Bank and Financial Accounts (FBAR). In accordance with FBAR, all money held in foreign accounts must be reported.
A tax haven offers lower tax rates and special exemptions. Some popular tax havens include the Cayman Islands, Bermuda, and the British Virgin Islands.
Swiss bank accounts
Switzerland has strict privacy laws, so it is a preferred overseas banking location for many individuals. Historically, some account names are concealed, making the country very attractive to overseas bankers. However, Switzerland has comprehensive policies to limit crime and uphold transparency in the banking industry. For instance, Swiss banks must verify your identity and source of funds before you can make a deposit. Swiss banks also report American deposits for accountability.
Illegal offshore account regulation
It is perfectly legal to open an offshore account. It is only illegal to hide assets in foreign accounts for tax evasion. Financial institutions report changes in particular accounts to the IRS, as the U.S. maintains banking agreements with numerous institutions worldwide to report income details on U.S. taxpayers.
The IRS has several options to pursue when a taxpayer fails to report critical information, willfully and knowingly, including various penalties and fines.