Tax Implications of Offshore Banking
By Justin Moyer, North Carolina Tax Controversy Attorney
As attorneys who work with clients facing different types of tax issues, we often get asked about offshore banking and the tax implications for moving money overseas. Using a bank outside of the United States is not illegal in and of itself; however, there are many rules to follow.
Each country and banking institution has its own rules and regulations as well as requirements to open an account. In the past, the term “Swiss Bank Account” was popular and thought of as a way to hide money and avoid paying taxes. Switzerland used to have extreme privacy laws and did not attach names to account numbers. This is no longer the case. Switzerland banking laws have evolved and now the information is turned over to foreign governments. Some other places like the Cayman Islands became popular for offshore banking, but now most countries have relaxed their privacy laws in an effort to curtail money laundering and illicit activities.
Tax evasion is not a legitimate reason for moving money to a foreign bank. There are legitimate reasons for offshore banking such as investing in a foreign country where you can earn capital gains that are not taxed by the foreign entity. You can also invest in a foreign country for stability reasons. If you have concerns about the stability of the economy, government and/or domestic banking platforms, you can move money to a “safer” country. Both of these reasons are recognized as legitimate for offshore banking.
Regardless of your legitimate reason for offshore banking, the Foreign Account Tax Compliance Act (FATCA) requires banks around the world to report balances and any activity of American citizens to the IRS or the banking institution will be fined. If you have an overseas account, you must declare its existence with the IRA. If you keep more than $200,000 and live abroad or more than $50,000 and live in the United States, you must use the more comprehensive IRS Form 8938.
The reason behind the IRS requiring this information is that housing money overseas through offshore banking can be used for tax avoidance or for money laundering – both of which are punishable crimes. All money must be declared, even if it does not result in a tax liability.
Investing in foreign trade indexes is not the same as offshore banking. Choosing to invest internationally is typically conducted through a domestic broker and for tax purposes handled the same as domestic stock investments.
If you are interested in offshore banking, discuss your situation with a knowledgeable tax attorney to ensure you stay in legal compliance. For more information on tax laws, contact our office in Raleigh to set up a consultation.