In the United States, it is legal to open an offshore bank account, but the rules regarding reporting for offshore bank accounts are stringent. It’s important to be aware of the rules and ensure compliance because failure to follow reporting regulation could lead to serious civil and criminal penalties, which include the possibility of imprisonment. The IRS harshly scrutinizes money that is held in foreign bank accounts, and they work diligently to prevent tax evasion - with incentives or without.
If you have more than $10,000 in foreign bank accounts, you are legally required to report these accounts to the IRS and the U.S. Treasury. In this article, we’re going to take a closer look at the requirements of offshore bank accounts when it comes to your tax reporting.
But first, with such stringent regulations in place, why would anyone consider offshore banking?
Offshore Banking: Legal Requirements vs. The Benefits
The question above is a legitimate question that deserves an answer. The truth is, despite all of these rules, more and more people are turning to offshore banking. The rules haven’t stopped anyone from going offshore.
Stable offshore jurisdictions hold promise for those who are interested in diversifying their wealth management strategies, getting better rates, and enjoying security from political and governmental turbulence. In addition, other benefits of offshore banking that make it valuable include better currency exchange rates, numerous new investment opportunities, and easy access to funds while traveling internationally.
The benefits are definitely there. The key is finding the right jurisdiction for your needs, but perhaps most importantly, remaining compliant is critical.
How to Remain Compliant
Here are a few things to keep in mind as you work to ensure that your offshore bank accounts are in compliance with U.S. IRS and Treasury regulations pertaining to foreign accounts.
1. FinCEN
The first thing you need to know about is FinCEN. FinCEN (the U.S. Treasury Department’s Financial Crimes Enforcement Network) Form 114 - Report of Foreign Bank and Financial Accounts (FBAR) is where foreign accounts must be reported each year.
Typically, this form is due at tax time, but it’s important to note that the FinCEN Form 114 / FBAR is not an actual part of the tax return. Instead, it is required to be filed online through the BSA E-Filing System website.
If you have more than $10,000 in foreign accounts, you are required to file the Form 114 / FBAR on a yearly basis. If you fail to file your FBAR when it’s required, you could be subject to fines and penalties.
2. FATCA
The second thing you need to be aware of in terms of the impact of offshore bank accounts on tax reporting is the FATCA (Foreign Accounts Tax Compliance Act). FATCA was designed as a check on U.S. taxpayers and financial institutions to be sure that information is filed appropriately for tax purposes.
Any income from abroad is typically required to be reported via FATCA, including money from foreign trusts and any foreign accounts. Usually, a Schedule B must be included with your tax return per FATCA. On Part III of the Schedule B, foreign accounts are addressed.
In addition, Form 8938 could be required. This is the Statement of Special Foreign Financial Assets.
3. Foreign Trusts
As you might imagine, not all international accounts are treated the same, but there are special rules and requirements regarding foreign trusts.
The IRS has changed their directives regarding foreign trusts, which spells out relief for many trust holders. According to IRS Revenue Procedure 2020-17, certain individuals owning and transacting in certain foreign trusts are exempt from reporting requirements. This typically applies to trusts that have been established for pension and retirement benefits, as well as those that have been set up for educational, medical, and disability benefits. For those who’ve been assessed penalties in regard to a foreign trust set up for one of these reasons, the IRS has offered the potential for penalties to get paid back.
If you are involved in an international trust, be aware that there are special rules in addition to the customary reporting rules of offshore bank accounts.
Takeaway
If you have a small amount, less than $10,000, invested in offshore accounts, then you likely won’t find yourself bombarded by reporting requirements, but since most offshore account holders have a chunk of money in their accounts, these reporting requirements are important to be familiar with. What’s more important is being aware of the fact that these reporting requirements change from time to time.
It’s critical to stay on top of the reporting requirements as they are now and be prepared to respond to changes in the future. There are a wealth of benefits in offshore banking, and as long as you are compliant, you’ll be able to reap the full benefits of going offshore.
MAR
2020
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