Offshore Accounts Not Off The IRS’ Radar

Money can be deposited in an offshore account, but stashing it outside the country won’t get it off the IRS’ radar. Out of sight is NOT out of Uncle Sam’s mind. In fact, the IRS has intensified its efforts targeting offshore issues in recent years because hiding money and assets in unreported offshore accounts is now a top tax scam.

A high profile case involving such enforcement activities is currently in the news. The Department of Justice (DOJ) is suing Paul Manafort, President Trump’s one-time campaign chairman, for approximately $3 million dollars. What did Manafort do? Well, actually, it’s what Manafort DIDN’T do that got him in hot water with the IRS. So the DOJ complaint alleges, Mr. Manafort failed to report interest received on money he deposited in foreign back accounts.

Interestingly, Ukraine is the source of the money Manafort deposited overseas. His income from consulting work with that country was placed in bank accounts in Cyprus, the U.K., and St. Vincent and the Grenadines. Oops! That sounds like a pretty big oversight. Forgetting to list one foreign bank account might possibly be believable, but twenty accounts in three different countries? The DOJ isn’t buying that story, and neither am I.

So what is an “offshore account?” It’s an account held with a bank existing in a foreign country. Offshore locations are generally, but not always, island nations. Nevertheless, landlocked countries are also popular offshore financial centers. Think Switzerland–it’s neutral and eager to receive your foreign money.

Financial institutions which are “offshore” provide financial services to non-residents. But why would an individual go to the trouble of depositing money in a foreign location? Three reasons can be offered for doing so. First, offshoring provides privacy and confidentiality. The Swiss, in particular, are known for their strict privacy laws which date back 300 years. Going offshore is common for high net worth individuals (HNWI’s) who are likely to be high profile and don’t want their local paparazzi snapping photos of them filling out a bank deposit slip with an outrageous number of zeroes on it.

Taxes are a second reason for opening a foreign bank account. Offshore accounts (“OA’s”) exist in known tax havens. Countries which are tax haven offers foreigners very low tax liability in a politically and economically stable setting. Depositors there seek to avoid or evade taxes in their home country which has different, and more taxing (pun intended), tax regulations. While OA’s can be used for illicit purposes such as money laundering, fraud, and tax evasion, such as account is not itself illegal.

Another plus for utilizing these accounts is their foreign location. This situation makes it more difficult for depositors’ assets to be seized by their home country. But difficult does not equate with impossible.

Uncle Sam is on to tax avoidance/evasion schemes using foreign bank accounts. To counteract them, the U.S. took the most logical step–it passed a law. The Foreign Account Tax Compliance Act, familiarly known as FATCA, was signed into law by President Obama in 2010 and requires U.S. citizens to report foreign income and assets to the IRS. Failure to do so can result in civil penalties of up to $10,000 and possible criminal prosecution. Problem solved, right? Well, it didn’t prompt Manafort to disclose his offshore holdings…

The U.S. government is also attacking the problem from another direction. It has focused on getting offshore financial centers to report the information on OA’s. This strategy seems to have been a bit more successful than relying on the honesty of account holders who are U.S. citizens. According to OECD, the Organisation for Economic Co-operation and Development, 100 countries automatically shared information on OA’s with taxing authorities in 2019.

Use of foreign bank accounts for tax avoidance is a worldwide problem. Most countries now require foreign holdings to be reported. Increasing calls have been made for offshore financial centers to become more transparent with global tax authorities. Accordingly, Swiss bankers no longer have sealed lips on their account holders’ behalf. James Bond is, no doubt, heartbroken at this change in banking practice. He famously remarked in 1999’s “The World Is Not Enough,” “If you can’t trust a Swiss banker, what’s the world come to?”

Back in what 007 would consider the good old days, Swiss bank accounts were identified by a number rather than the account holder’s name, thus keeping his identity anonymous. Today, however, Swiss banks must identify the ultimate account owner and automatically send client information to the foreign tax authorities in compliance with FATCA.

Not being a HNWI, I’ve never needed to open an OA. But, if I were going to open one, where would I go? The Caribbean offers some of the most popular tax havens. That’s a win-win situation. You can take care of financial business and then lounge on the beach with a fruity adult beverage.

The Cayman Islands is a top choice for opening an OA. Why? This tiny (only 102 square miles total) British Overseas Territory with a population of around 60,000 holds approximately 75% of the world’s offshore funds. Around $674 billion (that’s billion with a “b”) of those holding are U.S. funds. International financial and banking services make up 55% of the country’s economy. While small in size, the Caymans Islands is the sixth largest financial center in the world. Why is it so popular? It imposes NO direct taxation. There’s no capital gains, no payroll tax, no income tax, etc.

Originally, an OA was beneficial to HNWI’s. But with “progress,” all countries are now basically linked. So money deposited in foreign accounts will likely eventually be discovered. Swiss bankers have looser lips under current law, and global taxing authorities are aggressively searching for money outside their country. With only a domestic account here where I live, I don’t worry about being on the IRS’ radar for hidden assets. Paul Manafort though? He should be very worried.

WONDER-ing Woman:

Does an offshore account have a negative connotation? How do you feel about the IRS reaching out to foreign countries to check on U.S. citizens’ financial activities? Where would you open an OA if you were going to do so?