Offshore Banking: The First Steps to Coming Clean

You might have an offshore account to make business easier abroad, qualify as an expatriate, need it for better business, or possess one for other legitimate reasons. However, there are still rules to follow to comply with IRS regulations and the increase in regulations and investigations since 2008.The IRS has collected billions of dollars by detecting taxpayers with offshore assets, thanks in part to snitches that are highly rewarded. Don’t risk the large penalties and legalities of not reporting. Here are three steps to coming clean, and staying on top of proper reporting.

Step 1: Know Reporting Requirements

There are exceptions to reporting your overseas income – it all depends on your balance. If your accounts in total are $10,000 or more, you certainly have to file a few forms to the US Treasury. Also, you are obligated to report your entire income, wherever it may come from, including interest accrued on a foreign account. This applies if you have signatory authority over another individual’s foreign account.

Step 2: Understand the Penalties If You Don’t

There are no fees to file your income, inheritance, or accounts, but huge penalties if you don’t. Similar to the consequences of tax evasion pertaining to income and assets earned on U.S. soil, consequences pertaining to foreign accounts can include not only the additional taxes, but also substantial penalties, interest, fines, and even imprisonment.

UBS was the first major prosecution of a bank culminating in a record $780 million fine and a deferred prosecution agreement. For an average citizen, penalties include but are not limited to: $10,000 and up for FBAR, $10,000-$50,000 for FATCA, $10,000 or 35% of the money received (whichever is greater) plus additional fees for Form 3520.

Further, penalties earn interest, and the IRS can demand these filings at any time, now or 15 years in the future, plus each year you didn’t file is a separate violation, compounding the importance of reporting any and all foreign income. Criminal prosecution is low, but as stated above, the fees can be exorbitant.

Step 3: Know Your Options – Then Get the Forms and Go

If you have offshore accounts that have been open for awhile and you’ve either been negligent or simply in the dark, there are a few options, such voluntary and quiet disclosure. The Offshore Voluntary Disclosure Program (OVDP) is offered to those taxpayers with undisclosed offshore accounts or assets. You can approach this a few ways. Primarily, you can apply for a pre-clearance, by which you fax several documents including personal and financial identification to the IRS. The Criminal Investigation department will notify you via fax of clearance or non-clearance to voluntarily disclose foreign account using the necessary letter and forms; there is no guaranteed acceptance to the program. You may choose to bypass the pre-clearance and mail the disclosures letter and Forms 14437 and 14454.

Another option is the “quiet disclosure” route. This is a suspicious and fairly clumsy approach, however. You simply mail the missing FBAR forms and amending old returns to the IRS. Thousands and thousands of taxpayers do this yearly, hoping to not be penalized. Quiet disclosure is only a safe choice if you do not receive income from the account and has no ownership interest in it, or have paid all taxes on income from the account. A letter of explanation is a smart move in these circumstances. In general, quiet disclosure is risky, especially without the assistance of a tax professional.

If you’ve just opened a foreign bank account, or if you’ve just started reporting a longtime foreign account, expect to file at least one of these forms from now on:

  • FBAR (Report of Foreign Bank and Financial Accounts) Treasury Form TD F 90-22.1: Due June 30th of this year.
  • FATCA (The Foreign Account Tax Compliance Act—IRS Form 8938): Due with your tax return.
  • Inheritances and Gifts (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts–IRS Form 3520): Due upon receipt of the gift or inheritance.
  • Schedule B (Interest and Ordinary Dividends–Form 104A or 1040): File if you have a financial interest in, or signature authority over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust. Due with your tax return.

If you are abroad and have questions, there are IRS offices in Frankfurt, London, Paris, and Beijing.

Don’t risk the large and damaging penalties of keeping your offshore banking a secret – coming clean and potentially getting taxed on your assets far outweigh the consequences. Consulting a tax professional will help alleviate the burden, and ensure proper compliance!

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