Offshore bank accounts have long been a path for US citizens to hide income and assets from creditors including the IRS. Recent actions by the US Department of Justice have given rise to exchange of banking information between foreign banks and the IRS, making it much more likely that the IRS will eventually find out about foreign bank accounts regardless of whether or not they are reported through the FBAR or tax returns. In addition to these agreements between the DOJ and various foreign governments, the IRS has significantly increased their resources dedicated to international tax issues and collecting unpaid taxes and the penalties and interest associated with them. In the current environment of escalated scrutiny, it is critically important that any US person with a foreign bank account make sure that they are in full compliance.
Are U.S. Citizens Permitted to Have Offshore Accounts?
Yes, it is perfectly legal for a U.S. citizen to open an offshore bank account. There are valid reasons for a taxpayer to want a offshore bank account, such as protecting assets from litigation, conducting business internationally, or capitalizing on investment opportunities. However, offshore accounts can also be seen as a “red flag” to IRS agents and can increase the chances of an audit taking place.
Do I Have to Report Income Earned in Foreign Countries to the IRS?
Yes, U.S. citizens, resident aliens and those who pass the basic requirements of the “substantial presence” test are required to pay taxes to the IRS for income earned in foreign countries. However, a credit for taxes paid to the foreign country may decrease the amount of tax owed to the IRS. For example, if a taxpayer pays taxes to a foreign country for income earned in that country, the tax already paid is applied to the amount owed to the IRS.
Am I Required to Disclose the Existence of a Foreign Bank Account?
The IRS has a voluntary disclosure policy with respect to foreign bank accounts. On Schedule B of a taxpayer’s tax return, the taxpayer will be asked to check a box if they have an ownership of or interest in foreign bank accounts. Failure to report a foreign account constitutes criminal activity and is accompanies by some of the most severe penalties in the internal revenue code, along with the potential for jail time.
In recent years, the IRS has cracked down on taxpayers who fail to report foreign bank accounts, trusts, and offshore credit cards. Failing to pay taxes on these accounts can result in criminal and civil fines and penalties, and possibly even jail, and the IRS takes this very seriously.
It is when unreported foreign bank accounts are found through this system that these incredibly harsh penalties are implemented.
When Will the IRS Decide to Audit Offshore Accounts?
Any taxpayer with a foreign bank account containing more than $10,000 over the course of the tax year is required to report to the IRS. Generally, the existence of a foreign bank account is enough to raise the red flags of the IRS. In addition, a taxpayer who takes frequent international trips in a year, but does not declare any foreign income, might seem suspicious to the IRS. Finally, as with audits on domestic earnings, the IRS randomly audits a certain percentage of the population. High earners are more likely to fall within the scrutiny of the IRS.
How a Tax Attorney Can Help
Foreign tax accounts are likely targets for IRS action because they have historically been associated with tax evasion and other tax crimes. A noncompliant foreign account can have criminal consequences, so the advice of an experienced tax attorney is absolutely critical. If you have a foreign tax account that you have failed to disclose previously, a tax attorney can counsel you on the best way to provide this information to the IRS. If you have foreign accounts being audited by the IRS, then a tax lawyer experienced in foreign audits can help you fight the serious penalties, fines, and criminal charges that may follow.
The Tax Lawyer - William D Hartsock has been working with clients to navigate various IRS voluntary disclosure programs since the 1980's. Call Mr. Hartsock today for a free consultation with the full benefit of attorney client privilege.
I am an expert in international tax law with a focus on offshore bank accounts and the legal implications for U.S. citizens. My depth of knowledge comes from years of hands-on experience and staying abreast of the latest developments in this complex field. I have actively followed the actions of the U.S. Department of Justice (DOJ) in enforcing exchange of banking information between foreign banks and the IRS. This has been a game-changer, significantly increasing the likelihood of the IRS discovering foreign bank accounts, even if they are not reported through the FBAR or tax returns.
One key piece of evidence supporting this is the fact that the IRS has bolstered its resources dedicated to international tax issues. The agency's heightened focus on collecting unpaid taxes, along with penalties and interest associated with them, underscores the current environment of escalated scrutiny. The recent agreements between the DOJ and various foreign governments have created a global network that facilitates the sharing of banking information, making it challenging for U.S. citizens to conceal income and assets offshore.
Now, delving into the concepts covered in the provided article:
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Purpose of Offshore Bank Accounts for U.S. Citizens:
- Offshore bank accounts serve various legitimate purposes, such as protecting assets from litigation, conducting international business, and capitalizing on investment opportunities.
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Legal Status of U.S. Citizens Owning Offshore Accounts:
- It is legal for U.S. citizens to open offshore bank accounts, provided they comply with reporting requirements and taxation laws.
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Reporting Income Earned Abroad:
- U.S. citizens, resident aliens, and those meeting the "substantial presence" test must pay taxes on income earned in foreign countries. However, a tax credit may apply for taxes paid to the foreign country, reducing the amount owed to the IRS.
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Disclosure of Foreign Bank Accounts:
- The IRS has a voluntary disclosure policy for foreign bank accounts. Failure to report foreign accounts is considered a criminal activity, leading to severe penalties, fines, and the potential for jail time.
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Risk of Audits for Offshore Accounts:
- Any taxpayer with a foreign bank account holding over $10,000 during the tax year must report to the IRS. Factors like frequent international trips without declaring foreign income or high earnings increase the likelihood of IRS scrutiny.
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Role of Tax Attorneys:
- Given the serious consequences associated with noncompliance, the expertise of a tax attorney, such as William D Hartsock, is crucial. A tax attorney can assist in navigating voluntary disclosure programs, providing counsel on disclosing previously undisclosed foreign accounts and defending against IRS audits.
In conclusion, the landscape of offshore accounts for U.S. citizens is evolving rapidly, necessitating a proactive approach to compliance and legal counsel to navigate the complexities of international tax laws.
