There are many different reasons why people have offshore accounts. Some people prefer to have their money split between bank accounts in different countries because they regularly traveling between the countries where they have their accounts, such as having an account where their regular home is located and one where their vacation home is located.
Other people create offshore accounts to take advantage of a certain country’s privacy laws as applied to banking. For example, the Cayman Islands do not require the disclosure of the identity of the person establishing the account when a new bank account is created.
What Does “Offshore” Mean?
There are 2 ways in which “offshore” is referred to:
- Country – When referring to a country, “offshore” means a jurisdiction that offers financial secrecy laws in order to attract investments from outside its borders.
- Financial institution – When referring to a financial institution, “offshore” refers to a financial institution that primarily offers services to investors living outside the jurisdiction of the country where the institution is located.
Abusive Offshore Tax Avoidance Schemes
The IRS is concerned about offshore accounts where American taxpayers use them to conceal assets and income that are taxable, which is why it has created the Abusive Scheme Program to combat such concealments. Abusive schemes usually create structures that make it appear a nonresident alien or foreign entity is the owner of assets and income in order to make the assets and income non-taxable, when, in fact, true ownership remains with a U.S. taxpayer. Here are some different types of entities and schemes being used:
- 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
Can I Get in Trouble for My Offshore Account?
Not all offshore accounts are illegal. However, there is a booming industry of offshore practitioners who advise United States citizens to set up offshore bank accounts. They persuade citizens to have confidence in the secrecy laws of the jurisdiction where they are located, and they often claim that it is impossible for the IRS to find out about such an account and its earnings. You could get in trouble because hiding your income and assets in this manner constitutes tax fraud. This is because American citizens are required to report all financial interest in their offshore accounts that equals or exceeds $10,000. You may want to consult a lawyer who can tell you whether your offshore accounts are within the law.
What If I Am Accused Tax Avoidance?
Consulting a tax lawyer could be advantageous to you if you are accused of engaging in a tax avoidance scheme. An experienced attorney could explain your options and may help you with your problems.