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Offshore Banking: Separating Reality from Fiction

By October 23, 2020 No Comments

September 15, 2020 – New York, United States  

Offshore Banking:  Separating Reality from Fiction

Click here to read it in Spanish.

Click here to read it in Portugese.

How many times have you watched a movie of covert espionage between spies of enemy countries wherein there is at least one scene involving transfer of funds to a secret Swiss banking account?  In exchange for the disclosure of secret intelligence to the enemy, the spy expects a handsome deposit of money at a Zurich bank.  Presumably, the spy has opened this account to avoid any paper trail sourcing funds to his country’s enemy.  The secrecy afforded him/her by Switzerland’s banking laws places an obstacle to whomever among his/her own ranks is investigating his activities under suspicion of defection.

Plots like this make for interesting film, but hardly reflect reality.  Gone are the days when US citizens, interested in evading their tax obligations, would deposit funds in offshore accounts located at banks throughout Europe and the Caribbean.  The IRS treats money held in foreign banks differently than funds deposited at domestic banks.  Recent history has shown a concerted effort by the Treasury as a matter of public policy in tracking these foreign accounts.  The concern here is the lack of accessibility the Service will have to these accounts.  As such, rules and regulations have been promulgated deterring such offshore banking practices.

Conversely, there has been a long-time trend wherein foreign banks have become wary of accepting US deposits.  This reluctance evolved as a consequence of the increased demands made by the Department of Justice and IRS on foreign institutions to comply with US reporting requirements.  There is just so much time and energy these banks can devote to complying with these laws.  Further, not every foreign bank has the infrastructure to deal with such extensive compliance reporting requirements.  As someone who is a US citizen subject to IRS taxation, you can become a liability to a banking institution such that it may even hesitate in marketing and providing its services to you.  The best strategy then is to make yourself less of a risk by ensuring you have been in strict compliance with the law.

Since the 1970’s until 2013, US citizens owning foreign bank accounts had to file Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Bank Accounts.  The form was also known as the Foreign Bank Account Report (FBAR).  The forms were due annually and processed at the Treasury’s office in Detroit, MI.  In June 2013, the Treasury moved over to an electronic version of the form.  Known as the FinCEN Form 114, it demanded taxpayers to report offshore accounts totaling more than $10,000 in the aggregate with the Financial Crimes Enforcement Network.  This revised version of the FBAR had to pass through the Treasury’s Bank Secrecy Act E-filing System.  As such, this document is separate and apart from an individual’s income tax return, form 1040.  Historically, the deadline in 2014 for the form was June 30.  A failure to file the form subjected a taxpayer to a penalty as much as 50% of the value of the assets.  Pursuant to current law, the FBAR is filed on April 15 with an automatic extension available to October 15.  It is incumbent on all US persons to file the form.  US persons include citizens, resident aliens (green card holders or those meeting the substantial presence test or day count test) trusts, estates, and domestic entities.

Currently, there are severe penalties associated with the noncompliance of a filing of the FBAR form.  Violators can be subject to both civil and criminal charges.  In the event a taxpayer was negligent in filing the form, but nonetheless did not willfully evade filing, he/she can be subject to civil penalties of $10,000 per violation.  Willful noncompliance can be up to a $100,000 civil penalty with criminal penalties upwards of $500,000 or a five-year prison term or both.  Nonetheless, a taxpayer who did not purposely hide money overseas in order to avoid paying taxes by not filing the form is able to eliminate the late-filing and FBAR penalties but they will need to seek help of an experienced professional in this area to help them with this process.

The key to keeping up with FBAR filing obligations is maintaining accurate records of your foreign bank accounts.  The form will require the taxpayer to report the maximum value of each account during the reporting period.  By keeping meticulous records, the taxpayer will also be able to avoid having to file in years when the filing threshold of $10,000 is not met.  The factor to keep in mind with this form is that filing is obligatory even when the account(s) had a steady balance of $9,950 for the majority of the year with there being only one day the account(s) increased by $50.  Values are reported in US dollars using an end of the year exchange rate.  Further, the Treasury must be provided with the name on the account, the account number or designation, account type, and the name and address of the institution with which it is maintained.

Millions of US persons own offshore accounts and the reasons for doing so are varied.  In September of 2018 the Federal Assistance Voting Program estimated there to be 5.5 million US persons living outside of the States.  ((n.d.). Retrieved from https://www.fvap.gov/uploads/FVAP/Reports/2018-Overseas-Citizen-Population-Analysis-Report.pdf).  However, there were less than 1 million taxpayers who filed FBARs that year.  Of course, the average Joe American living abroad or living here and owning assets abroad does not necessarily possess more than $10,000 at any given moment during the year in any of these accounts.  Nonetheless, it is incumbent that anyone with foreign assets be apprised of these filing requirements and the associated penalties for noncompliance.  Even more serious than disclosing these assets is making sure to pay the taxes earned on the income sourced to these foreign bank accounts.  In that vein, be aware that the FBAR represents just one of several other financial reporting forms required of US persons having funds overseas. 

The idea that money can be forever hidden away in offshore accounts is an imagined misconception.  This misconception is perpetuated by the creative minds of filmmakers who are not in any way mirroring the truth in reporting requirements of these assets to the IRS.  Our psyches absorb the move producer’s imagination such that when we watch the film, we all hold a common understanding of the film’s genre.  As moviegoers, we make the assumption that as fictitious as the plot may be, there is some basis for it in the real world.  Nevertheless, the presumed notion that millions of dollars are being held in undisclosed bank accounts owned by mysterious and secretive individuals throughout the world is not a reality.

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA).  She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental. 

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