Offshore accounts are a hot topic these days. The IRS and treasury officials worldwide are on the hunt for untaxed revenue streams. While it is not illegal for a U.S. taxpayer to have an offshore account, the penalties for not reporting that account are enormous. This post takes a step back and asks why people have offshore accounts.
The genesis for this post comes from a story recently published in the Wall Street Journal called, “Offshore Accounts: Are They a Good Idea?” Financial advisers interviewed for the story said that although there is nothing illegal about a properly reported foreign account, there is no great advantage to them either. Many would argue that they simply are not worth the reporting hassle.
When examined from a purely asset protection standpoint, the results are mixed. If your goal is to hide your assets from the IRS, good luck. Uncle Sam has a prison cell waiting with your name on it. It’s getting harder to hide money from Uncle Sam and the risks are huge. For earlier generations, it was pretty easy to open a nominee account and simply wire money overseas. Pre 9/11, it was even easier to pack a suitcase full of money and fly it out of the country. The new era of mass data has made hiding assets from the government very difficult (and very risky).
Although there are some great asset protection strategies and trust vehicles available in the U.S., those are best used to protect your assets from non-government creditors. Even then, we still believe it is better to go offshore with at least some of your assets.
Most of our clients don’t open offshore accounts to evade taxes or as part of an elaborate asset protection scheme, however. They do so out of convenience or for economic reasons. Although many still picture a cigar-smoking businessman with numbered Swiss accounts when they think of offshore accounts, those types are in the small minority.
So who has offshore accounts and why? American expats who have decided to retire overseas, U.S. residents who were born overseas, dual nationals and business owners who have business interests in another country. The new faces of offshore account holders include the physician born in India who sends money home to his family, the Canadian who works across the border in Detroit (and thus becomes a U.S. taxpayer) and the American couple who retired to Costa Rica.
For all of these people, having an offshore account is a matter of convenience or necessity.
There are also a growing number of Americans who simply have little faith in the American banking system and the government’s seeming willingness to print more and more money to keep everyone happy. They believe that someday soon there will be a day of reckoning and the dollar (and our banks) will be worthless. For these folks, diversifying their savings into other banking systems and economies just makes good economic sense.
Many also think that the days to move money offshore are numbered. While it is still legal to move money offshore, the rhetoric from some Washington politicians suggests otherwise.
There are many legitimate reasons to open a foreign account. Just make sure you do so legally. That means every year before June 30th you must report your offshore financial holdings if the aggregate balance exceeded $10,000 at any time during the year. It’s not just bank accounts but foreign hedge funds, CD’s, brokerage accounts, precious metal accounts and even some insurance products and foreign pension plans. If you hold the latter, consult with a tax attorney or CPA well versed in foreign reporting requirements.
Annual reporting is done on Schedule B of your income tax return and on an FBAR form.
Once you get the hang of it, annual reporting is quite simple. If you are like most people and rely on a preparer, make sure he or she knows what they are doing. While most preparers know how to report a bank account, compliance falls off significantly when one moves to foreign held real estate, offshore trusts, hedge fund accounts and the like.
If you have never filed an FBAR and were previously required to do so, hire a tax lawyer. Immediately. Simply filing back FBARs and amending old returns could get you in big trouble. The IRS calls this a “quiet disclosure” and says it will penalize folks who attempt this method of compliance.
The penalties for not properly reporting a foreign account are enormous. At the low end, $10,000 per year for each year an account was not properly reported. If the IRS thinks your failure to report was willful, the penalties are the greater of 50% of the highest account balance or $100,000 per year for each unreported account and for each year that account was not reported. If the IRS really wants to get nasty you could go to prison and pay fines up to $500,000 in addition to the civil penalties.
The good news is that there are ways to come into compliance without going to jail or simply handing over all your money to the IRS. With FATCA looming on the horizon, the window to take advantage of some of these amnesty programs is closing fast.
There are many good reasons to open an offshore account. The paperwork is relatively simple too. Setting up a foreign account for the first time? Do some research and speak to professionals. If you have not already reported existing offshore accounts, however, talk to a lawyer right away and don’t just hope you won’t get caught. Even if you choose to renounce your citizenship, the IRS can continue to pursue you if you were not in compliance at the time you renounced.
About the author. Brian Mahany is a tax lawyer specializing in foreign tax reporting. His services are confidential and protected by the attorney client privilege. Brian can be reached by email at firstname.lastname@example.org or by telephone at (414) 704-6731.