Offshore Banking | Foreign Banking
An offshore bank account is an account at a bank located outside the nation of residence of the depositor. An offshore bank account is convenient if you do business with the country where the account is located, travel there regularly, or work there from time to time. Offshore bank accounts are often left over from a prior stay in the country or are acquired by inheritance or gift from a family member living in the other country.
It has been easy in the past not to pay much attention to offshore bank accounts acquired over time. Foreign banks have competed with each other to provide bank services and have considered privacy and anonymity an important part of their service. Very little routine reporting of these accounts was provided.
Customers of offshore banks were lulled into an understanding that money in these accounts was safe and that unless the customer voluntarily reported the income to the tax authorities, it was unlikely that the tax authority in their home countries would ever discover the existence of the account. There was a culture of collusion and acceptance that although not reporting these bank accounts was a bad thing, that no one reported their offshore account and that it was acceptable or even expected that you would leave the earnings off of your tax return.
An industry developed in certain countries to bring financial service jobs and industry to those countries. The banking laws were designed to provided stronger assurances of privacy for banking transaction. Special rules were created for the benefit of international banking customers. Tax laws in these countries were written to minimize any local country tax on the earnings on these accounts. Small countries, in particular many island nations adopted very favorable banking and tax rules and the tax haven industry was created.
Why are Offshore Bank Accounts in the News?
Over the past ten years, customers of offshore banks have learned that the game has changed. Bank secrecy has been cracked. The U.S. has bullied banks in other countries into reporting banking transactions with U.S. taxpayers with two powerful threats: 1) non cooperating banks will find that all of their financial transactions with the U.S. will be subject to a high withholding tax and 2) any non cooperating foreign bank holding U.S. assets risks having those assets frozen or attached by tax liens pending releasing requested tax information.
A flood of information is flowing into the IRS concerning foreign bank accounts. It is no longer a question of whether or not information will be turned over, but simply when such information will be in the possession of the IRS and when the IRS will have the manpower to look at it and do something about it.
Many innocent taxpayers with foreign bank accounts are worried that they will be caught up with the criminals. It is tough to defend yourself against accusations of wrongdoing when your defense is everybody else did it. A better presentation is to show how your relationship with the international account occurred naturally over time, and from your usual business and family relationships.
Call Paul Wigg-Maxwell – (973) 507-9760 for international tax advice. Paul is an international tax attorney with over 25 years of experience representing individuals and business with cross-border ties.