Offshore Accounts Aren’t Off The Radar Anymore
Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to find the best credit card rewards. Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and U.S.News.
In the past when people put their money in an offshore bank account, they mostly had one thing in mind: to keep their money in a tax free environment and do with it as they wished. In other words, tax evasion. Many foreign banks actively recruited these types of investors, and then armed them with anonymous charge cards to carry out their financial business in secrecy. The money would sit safely in their numbered accounts, earning interest tax free, and because of the strict privacy laws enforced by offshore countries, no one would be the wiser.
Or so they thought.
The Swiss, most people’s idea of the ultimate in privacy banking, shocked the financial world by disclosing the names of 4,500 Americans who had hidden away assets in their bank, UBS AG. The U.S. filed suit against the Swiss to force them to disclose the names, and to the amazement of the world, they buckled, despite their decades old rule of absolute privacy.
What’s more, Congress passed a post-911 law that makes it virtually impossible for anyone to hide assets from the U.S. government in a foreign account. The law was initially passed to help fight terrorism, but has since been used to buckle down on tax cheats. Anyone who holds a combined total of $10,000 or more in offshore accounts must report it to the IRS and pay taxes on it. They are currently enforcing this rule by asking the so-called tax havens to sign Tax Information Exchange Agreements (TIEA) which encourages them to share banking information about U.S. citizens. This has resulted in more and more offshore banks refusing to even open accounts for Americans. Even the toughest of independent governments have signed the treaty, such as Panama, which was the offshore banking industry’s last hope for absolute secrecy.
So much for privacy banking and tax havens.
Obviously, there are people who will still try and skirt the system. Just type “offshore banking” or “swiss bank account” into a search engine, and you’ll be bombarded by promoters trying to convince you that there are still major benefits to the concept. With the erosion of tax havens and privacy laws, who are these account holders, and why do they still do it?
- Headstrong Tax Evaders. There will always be people who try and get around the tax laws. But International Tax Attorney Andrew Mitchel gives this warning: “What the individuals may not realize is that almost every offshore financial transaction of any significance must be reported to the I.R.S. in one manner or another. The penalties for failing to report the offshore activities to the I.R.S. can be enormous.”
- Debt Dodgers. There are others who owe the IRS money, or are even trying to dodge their child support obligations or legal judgments. They make use of offshore banking with the belief that some rogue foreign bank will ultimately protect them. It’s a fairly sane argument until you consider the Swiss—whoever thought they’d fold?
So, the question begs to be answered: what’s next? If the government is bearing down on tax havens and privacy banking, what will the proponents of these accounts do? According to some, the next move is to set up corporate offshore accounts signed by nominees. Andrew Mitchel says that while this may afford some asset protection, the substance of the transaction is what drives the tax law. In other words, Mitchel says, “If the shares of the corporation (or other entity, such as a trust or foundation) are effectively controlled by the U.S. individual, U.S. tax law will treat the foreign entity as being owned by the U.S. individual, and the U.S. tax reporting requirements will apply.”
All in all, it seems like pretty risky behavior considering the IRS’s motto concerning offshore illegal holdings: “Come to us before we find you.”
So, what are the real benefits of an offshore bank account? A slight chance that you’ll be able to hide your assets from a creditor, and an increased interest rate that currently runs about 4% APR. All with no FDIC insurance.
No thank you; I think I’ll stash my money where I can keep an eye on it.
Barb remarks: Fooling around with the IRS usually works out poorly; just ask Wesley Snipes.
Barb’s questions; Do you know of anyone personally with an offshore account? How has it worked out?
Do you think the government is getting overinvolved in too many private areas?