Buzz
Offshore banking is not something you typically encounter in everyday conversations. It's usually associated with news about tax evaders who were caught, or featured in plots like the current season of How to Get Away With Murder.
However, using a bank account outside your home country's borders is far more common than just criminal use.
Some people opt for offshore accounts to maintain privacy, facilitate international transactions, or to ensure financial and political stability.
You might not be worried about any of those concerns, and we’ll assume you’re not out to dodge your taxes. But after watching enough action movies, you might realize this is some knowledge you’ll want to keep for the future.
When you use offshore banking, remember, you still owe Uncle Sam.
Offshore accounts are often seen as tax havens. If your home country is unaware of your funds, they can’t tax them, right? Wrong, my clever friend who’s thinking about being sneaky.
Storing your funds in an offshore account is perfectly legal. But hiding them? That’s a different story—it’s illegal.
Offshore funds must be reported on a Schedule B. Depending on how much you have abroad and where you live, you may need to file Form 8939, a Statement of Foreign Financial Assets. For instance, if you reside in the U.S. and your offshore holdings exceed $75,000 (for an individual) or $150,000 (for a joint return) at any time during the year, you must file the Statement of Foreign Financial Assets.
Wait, there’s more! If the total balance of your foreign accounts exceeds $10,000 at any point during the year, you must file an additional report beyond your regular taxes. This form, the Report of Foreign Bank and Financial Accounts (FBAR), must be submitted through a separate electronic system and is due by June 30 each year.
If you fail to file the required forms with Uncle Sam, here’s what could happen:
If you fail to file Form 8938
you may face penalties: a $10,000 fine for failure to file, an additional penalty of up to $50,000 for continued failure after IRS notice, and a 40% penalty on any tax underreporting tied to undisclosed assets.
For the FBAR, failing to report transactions, if unintentional, could lead to a fine of up to $12,921, but if you deliberately withheld information, the penalty could be 50% of the undisclosed amount (at least $129,210).
There was once a voluntary disclosure program for individuals who realized they needed to file reports on their offshore accounts. From 2009 to 2018, over 56,000 taxpayers voluntarily reported their offshore holdings, paying $11.1 billion in back taxes, interest, and penalties, according to CNBC. The IRS ended this program in September 2018.
So, how exactly do you open an offshore account?
Opening an offshore account is a bit intricate, but manageable. Common destinations for offshore accounts include Belize, Switzerland, the Cayman Islands, and Singapore, as noted by the blog The Expat Money Show. These offshore havens typically offer low taxes, high privacy in banking, and English-speaking environments.
Be ready with the following documents, as recommended by Investopedia:
Driver’s license or passport
Proof of residency
Identification verification documents (if required)
Bank statements proving your financial standing
Evidence of the source of your offshore account funds (pay stubs, investment statements)
Your preferred currency
Typically, you'll fund your offshore account via wire transfers, though some banks may allow you to use a debit card for withdrawals.
Once everything’s set up, your only concern will be filling out all those U.S. tax forms! Who doesn’t love a good form?
But let’s get back to the issue at hand
Several high-profile cases have recently made headlines in the world of offshore banking and money laundering, so let’s quickly review these notable events.
As I mentioned earlier, just having an offshore account doesn’t automatically mean someone is involved in shady activities. However, the Paradise Papers did expose some well-known individuals who were already engaged in illicit activities, further tarnishing the reputation of offshore banking. The Paradise Papers leak was the world’s second-largest data leak, according to The Guardian.
The largest leak? The Panama Papers. These documents, which came from a Panamanian law firm called Mossack Fonseca, revealed how clients used shell companies to launder money and evade taxes. The leak implicated 12 current or former heads of state, over 60 relatives and associates of those leaders, and even FIFA. To date, more than $1.2 billion in back taxes has been recovered from those involved across the globe.
This scandal has recently made its way to the subscription screen in the highly debated Netflix movie, The Laundromat.
