If a particularly challenging day at the office isn’t enough to make your head spin, managing an offshore bank account—and the potentially steep penalties for under-reporting them—just might do it.
The U.S. tax system in principle sounds simple enough. It’s one of just two countries with a universal policy. That means it doesn’t matter if you’re investing, earning, or building a business in Connecticut or Israel—you pay taxes on what you earn, store, and accrue accordingly as a citizen. But while ‘universal’ would seemingly go hand-in-hand with simplicity, international tax planning is actually highly personal and contingent, with webs of confusing rules.
Sizing Up the Risks of Offshore Accounts
Navigating the waters of an offshore bank account often involves judging an iceberg by boat, not from below the water. When you hear of the countless stories of individuals and businesses hit with staggering fines and even criminal liabilities for misinterpreting (or, if we’re honest, just missing altogether) the appropriate tax forms and rules, it becomes clear why it’s best to get in the water to really see the scope of these dangers.
That’s especially true if it’s your aim to actually enjoy some of the benefits of offshore bank accounts and investments, of which there are many. To be certain: investing your money outside the US isn’t illegal, whether your bottom line is asset protection or wealth growth, and whether you approach the process from an offshore company formation, residence in Europe, or offshore merchant account.But you do need to know the rules of the game, or otherwise risk needlessly handing penalty money over to Uncle Sam.
An Offer of Offshore Amnesty
The IRS has in recent years made headlines for an amnesty program for voluntary disclosure of previously untaxed offshore accounts, a welcome breath of fresh air for the estimated 6 million expats living or working abroad that are stifled under heavy financial burdens. But even in this olive-branch offering, the penalties are less ideal than filing correctly in the first place.
Penalties in recent years have ranged from owed back taxes, interest and 5% of undisclosed foreign assets to a 27.5% penalty on all overseas assets. Still, compared to the steep 50% penalty on assets if the IRS discovers your account before you disclose it (which is increasingly likely thanks to new disclosure laws foreign banks have through FATCA, or the Foreign Account and Tax Compliance Act) the reduced penalties sound like a cakewalk.
Penalties on offshore bank accounts, like interest, can also compound. If you owe on a balance, it’s amplified by how many years you’ve failed to file an FBAR form, ranging from a minimum of $100,000 or 50% of your total balance each year for up to six years. And penalties can start for accounts with as little as $400 in them. The IRS also sees the penalties as per account, meaning you could be facing an exponential increase in fines for each year and for each account you don’t file. We’re generally in favor of exponential increases. Just not here.
As it turns out, out of sight doesn’t always mean out of mind when it comes to an offshore account. Taking care to consult an expert could mean saving hundreds of thousands of dollars from seizure, or even avoiding criminal liability in some cases. Contact the consultants at CS&P to see how we can help you navigate the dangers and rewards of offshore accounting.