Is Offshore Banking Illegal?

With all of the hype around offshore banking these days, many are wondering is offshore banking illegal. Just about every client calls with a statement like, “hey, I don’t want to do anything illegal, but…” The possibility that offshore banking is illegal permeates the industry and the media.

The truth is simple: offshore banking is not illegal.

What is illegal is failing to report an offshore account to the tax authorities. So long as you file the proper paperwork with your tax return, you’ll be in compliance and your offshore account will be “legal.”

I should point out that this article on whether offshore banking is illegal is written from an American point of view. We gringos can be hit with big fines and even jail time for failing to disclose an offshore account. Europe is following Uncle Sam’s lead (through the OECD), but laws vary from country to country.

The mainstream media is filled with claims that offshore banking and international asset protection is illegal. But, they’re both tried and true techniques… so long as you follow the rules and pay your taxes, all is well.

• For a detailed article on the media and offshore asset protection, see: Don’t Believe the Media Hype Around Offshore Asset Protection Trusts

Paying taxes or not paying taxes is at the heart of this issue. People with unreported offshore accounts don’t report because they don’t want to pay tax on their income. Again, it’s not the offshore bank account which is illegal, it’s the failure to report that account (and pay) to the tax authorities.

And it’s the IRS who’s pushed the idea that offshore banking is illegal. The Service has turned failing to report and pay taxes into a criminal matter. Back in 2003, no one went to jail for offshore banking. Beginning in 2005 and Swiss bank accounts, the IRS went all in and started putting its citizens away for years for unreported accounts.

These prison sentences had little to do with the underlying crime. The IRS had figured out it could raise billions of dollars from abroad by making examples of a few unfortunates. They created to Voluntary Disclosure Program and started arresting anyone they could find with an unreported offshore account.

Overall, the voluntary program has resulted in more than 45,000 voluntary disclosures from individuals scared into compliance. The cash haul has been about $6.5 billion in back taxes, interest and penalties from 2009 through 2014. The program is still running, but the IRS hasn’t released data any since 2014.

Portraying offshore banking as illegal has been very profitable for the U.S. Internal Revenue Service. As a result, Americans with offshore accounts have big time targets on their backs and must be cautious not to anger the beast.

Let’s talk a minute about the reporting requirements for offshore accounts.

If you have a bank or brokerage account outside of the United States, you probably need to send in a form each year to the Treasury. If you have more than $10,000 in accounts abroad, you must file file U.S. Treasury Form TD F 90.22.1 (generally referred to as the FBAR).

Note that this is $10,000 combined in bank and/or brokerage accounts. So, if you have $3,000 in 5 accounts outside of the United States, you have a total of $15,000 offshore and must report.

This cumulative total is taken from your highest balance during the year. If you have $1,000 in your account for 364 days, and $11,000 for one day of the year, you must file an FBAR and report a balance of $11,000.

These reporting requirements apply to anyone who is the beneficial owner of an offshore bank account and anyone who is a signor on an offshore bank account. Placing a nominee between you and your foreign account does not absolve you of this obligation.

Exceptions to the FBAR filing requirements are:

• Certain foreign financial accounts jointly owned by spouses
• United States persons included in a consolidated FBAR
• Correspondent/Nostro accounts
• Foreign financial accounts owned by a governmental entity
• Foreign financial accounts owned by an international financial institution
• Owners and beneficiaries of U.S. IRAs
• Participants in and beneficiaries of tax-qualified retirement plans
• Certain individuals with signature authority over, but no financial interest in, a foreign financial account
• Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
• Foreign financial accounts maintained on a United States military banking facility.

The bottom line is this. An offshore bank account is not illegal. Failure to report an account and pay the taxes due is illegal. For this reason, you should hire a U.S. expert to setup your offshore structure and keep you in compliance.

I hope you’ve found this article on offshore bank accounts to be helpful. If you can look past the media hype, and withstand pressure from the IRS to keep your money at home, setting up offshore can increase your investment returns and provide solid asset protection. Just be sure to stay on the right side of the law.