Offshore Income and Filing Information for Taxpayers with Offshore Accounts
U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign accounts and pay taxes on income from those accounts at their individual rates.
There are many legitimate reasons for holding offshore accounts, including convenience, investing and to facilitate international transactions. By law, U.S. taxpayers are not permitted to use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid paying tax.
In most cases, affected taxpayers need to fill out and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Additional filing requirements apply to those with foreign trusts.
Separately, taxpayers with foreign accounts whose aggregate value exceeds $10,000 any time during the year must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return and must be filed by June 30 each year.
The reporting requirements of the Form 8938 and FBAR differ. More details on who most file and the specific type of assets that must be reported for both forms can be found on the IRS.gov.
Failure to report the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties.
For the Form 8938, the penalty may be up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.
For the FBAR, the penalty may be up to $10,000, if the failure to file is non-willful; if willful, however, the penalty is up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply.
Taxpayers with undisclosed accounts should consider options available under the expanded streamlined filing process or the Offshore Voluntary Disclosure program.
Breaking Down Tax Haven
Offshore tax havens benefit from the capital their countries draw into the economy. Funds can flow in from individuals and businesses with accounts setup at banks, financial institutions, and other investment vehicles. Individuals and corporations can potentially benefit from low or no taxes charged on income in foreign countries where loopholes, credits, or other special tax considerations may be allowed.
A list of some of the most popular tax haven countries includes: Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Cook Islands, The Island of Jersey, Hong Kong, The Isle of Man, Mauritius, Lichtenstein, Monaco, Panama, St. Kitts, and Nevis. Worldwide there is not a comprehensively defined standard for the classification of a tax haven country. However, there are several regulatory bodies that monitor tax haven countries, including the Organization of Economic Cooperation and Development (OECD) and the U.S. Government Accountability Office. Characteristics of tax haven countries generally include: no or low income taxes, minimal reporting of information, lack of transparency obligations, lack of local presence requirements, and marketing of tax haven vehicles.
- Tax havens provide the advantage of little or no tax liability.
- Offshore countries with little or no tax liabilities for foreign individuals and businesses are generally some of the most popular tax havens.
- Investors and businesses may be able to lower their taxes by taking advantage of tax-advantaged opportunities offered by tax havens however entities should ensure they are compliant with all relevant tax laws.
Tax Justice Network list of tax havens
Tax Justice Network’s (TJN) approach aims to be comprehensive, so the list produced in 2007 was a lengthy one. It included OECD countries that offer some tax haven facilities or offshore financial services, even if they do not account for a major part of the economy. This means that the all jurisdictions in the OECD tax haven list are included. These can be referred to as ‘pure’ tax havens: the standard offshore island states which facilitate tax avoidance through low tax rates and secrecy (SOMO, 2006). In addition, TJN also considers OECD member countries with harmful preferential tax regimes as tax havens. According to TJN, countries with a broader economic base have a greater responsibility to end any provisions in their laws which facilitate avoidance of the laws of others, and it should not be only the small jurisdictions that are targeted. Furthermore, TJN extended its tax haven list by performing a reputation test. Various members of the network have proposed countries that they view to be a tax haven. The composers of the list then conducted a reputation test by reviewing tax planning websites and reviewing documentation of tax legislation in the jurisdiction.
Types of Offshore Tax Avoidance
There are many different devices taxpayers utilize to conceal transfers of money or property to foreign entities for offshore tax evasion, including:
- Foreign trusts
- Foreign corporations
- Foreign (offshore) partnerships, LLCs and LLPs
- International Business Companies (IBCs)
- Offshore private annuities
- Private banking (U.S. and offshore)
- Personal investment companies
- Captive insurance companies
- Offshore bank accounts and credit cards
- Related-party loans
Once money or property titles are moved offshore, the taxpayer can manage it with ease using fund transfers. Although this is technically legal, it is incredibly frowned upon by the IRS. The public is also maddened by the recent revelations in offshore tax avoidance; low-income families struggle to meet their tax obligations while the super-rich avoid paying anything at all using offshore tax havens. Small business owners are sometimes crippled by their debt, but huge companies such as General Electric somehow managed a $0 tax bill in 2010.
History of Offshore Bank Accounts
It is an unfortunate fact that Europeans have always been subjected to relatively heavy tax burdens. This was as true on the British Isles as it was on the continent. Europeans were faced with the prospect of watching their hard earned assets and wealth diminish. Every grasp of the tax collector’s hand plundered their wealth. Therefore, the continent was ripe for a solution.
Then a solution came. The small, island nation state known as the Channel Islands came up with an idea. They convinced these frustrated depositors that deposits placed in its banks could be free from scrutiny; hence, the heavy-handed taxation burden. These benefits convinced many wealthy Europeans. Soon this service thrived. Other small jurisdictions took note. They, too, became savvy to the foreign capital-attracting magnet and they began to revamp their banking institutions. A handful of countries adopted sound, pragmatic banking rules and regulations. Thus, they eased the potential concerns of investors and depositors. The Offshore bank was off to a running start!
And soon the term “Offshore banking” became synonymous with any smaller, haven jurisdictions. They offered safe, secure, confidential banking with practical regulations. Soon the rest of the world was “in the know.” They began to look at these havens as viable solutions to their needs. Americans, Africans, Asians, etc., found these Offshore bank accounts quite useful for a myriad of reasons. Unlike their banks at home, these Offshore banks were not regularly subjected to political turmoil or economic strife. Most educated business people knew them the for their political and financial stability and asset protection benefits.