On April 3, 2016,
the German newspaper Süddeutsche Zeitung
published the ‘Panama Papers,’ which were confidential
documents belonging to Panama-based law firm Mossack Fonseca. Among other
things, the papers exposed over 214,000 tax havens for politicians,
celebrities, and current or former world leaders.
While most of the
documents involved offshore business entities that were 100% legal, others
identified shell corporations designed to evade taxes and dodge international
sanctions. Suddenly offshore banking became synonymous with money laundering,
tax evasion, and other criminal activity, and questions arose about the
legality of offshore accounts.
Offshore Accounts Legal?
Yes. There is
nothing illegal about using a bank outside of your country of residence unless
you open the account with the intent of committing tax evasion. Many Americans
open offshore accounts for reasons like the following:
- Higher interest rates. Banks in some countries
pay a significantly higher interest rate on deposits.
- Financial security. Overseas accounts can
protect your wealth against a potential decline in your home currency’s value.
These accounts are also harder targets for frivolous lawsuits.
- Flexibility. Funds in an offshore bank account
can be used to pay debts and expenses you might have outside the country.
Contrary to popular belief, you don’t have to be a millionaire to banks overseas. You can open an account with as little as a few hundred dollars. However, the World Trade Organization and the Organization for Economic Cooperation require banks to report information about their foreign account holders, and the Foreign Account Tax Compliance Act (FATCA) directs offshore institutions to inform the IRS about the financial holdings of U.S. citizens.
Do Offshore Accounts Affect Your Taxes?
You are still
responsible for paying U.S. taxes if you earn money abroad or hold it in an
offshore account. If you live and work in a foreign country, the Foreign Earned Income Exclusion may allow you
to exclude up to $105,900 of your earned income, but the rest (like interest
income and dividend income) is taxable.
FATCA requires you
to file a Form 8938 if you meet the following criteria:
- You are required to file a tax
- Your foreign-held assets are worth
$50,000 on the final day of the tax year or more than $75,000 at any time
during the tax year (if you’re single) OR
- Your assets are worth over
$100,000 on the final day of the tax year or over $150,000 at any point during
the tax year (if you’re married and filing jointly)
If you are required
to file Form 8938 and fail to do so, you can be penalized up to $50,000 in
addition to a 40% accuracy-related penalty.
If you hold funds in
foreign accounts that exceed $10,000 in the aggregate, you must file a form
called the Report of Foreign Bank and Financial Accounts (FBAR) with the IRS. The filing deadline is
April 15, or October 15 with an automatic extension. In addition to the
penalties for failing to file Form 8938, you also face a penalty of $10,000 per
violation for failing to file FBARs timely. If the government thinks you did
not file wilfully, the penalty is the greater of $100,000 or 50% of the amount
in the account at the time of the violation.
If You Owe Back Taxes?
If you have foreign earnings that you did a report on your previous tax returns, the IRS has several different programs to get you back in compliance. In the Updated Voluntary Disclosure Practice, you can come forward and arrange to pay all taxes owing without worrying about criminal liability.
To qualify for the program,
you must file original or amended tax returns and FBARs for the past six years
and pay any tax, interest, and penalties owing. If you are being audited by the IRS, it is too late to enter
with a New Jersey Foreign Income Tax Attorney
Holding money in an
offshore bank account isn’t illegal, as long as you pay the appropriate taxes.
If you failed to disclose your foreign accounts and want to come forward,
contact Paladini Law by calling 201-381-4472 or filling out our online
form. Attorney Brad Paladini will review your eligibility and help you negotiate a payment plan with the IRS so that you can
catch up on your obligation and face the future with peace of mind.
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