Are the Benefits of Offshore Accounts Worth the Risks?

There has been a great deal of commotion surrounding the use of offshore bank accounts to shield assets from authorities in the United States. Some of these accounts are used for the purpose of evading income taxes, but there are also many situations where an individual has foreign accounts for legitimate reasons.

While there is nothing illegal about holding assets in foreign bank accounts, the complex regulations and reporting requirements can be very difficult to keep up with, even for many seasoned CPAs and tax return preparers. This exposes many well-meaning taxpayers to the risk of criminal prosecution and onerous civil penalties. The federal government has made the identification and prosecution of undisclosed foreign account holders a top priority.

Through the use of tax treaties and the criminal prosecution of foreign banks who have aided American account-holders, the federal government is tightening the noose around those with undisclosed foreign bank accounts. Switzerland, notorious for its banking secrecy, has all but been eliminated as a tax haven for Americans. Banks in several other countries are also being pressured into revealing their American account holders to US authorities.

In order to encourage future compliance, the IRS rolled out their Offshore Voluntary Disclosure Initiative (OVDI), a program allowing those with undeclared foreign bank accounts to voluntarily disclose the existence of the accounts and pay taxes and penalties, without the risk of being criminally prosecuted. The 2009 program was so successful that the IRS renewed it in 2011. The current version, the Offshore Voluntary Disclosure Program (OVDP), started in 2012 and does not have a scheduled end date.

In addition to the legal risks, maintaining foreign accounts does not make sense for most individuals, from a financial and administrative perspective. Opening a foreign account often requires hiring an international tax planner. The additional reporting requirements result in additional fees paid to CPAs and other domestic tax advisors. When it comes time to file the required tax documents in the United States, obtaining the necessary information from the foreign accounts can be difficult and time consuming. If the goal is to shield assets from potential creditors, there are alternative measures available domestically. For example, one might purchase liability insurance, which may cost less than the costs associated with opening and maintaining foreign accounts. Another option is to place assets into a domestic asset-protection trust.

If you have undisclosed foreign bank accounts, the opportunity to avoid the risk of criminal prosecution by taking part in the Offshore Voluntary Disclosure Program may be limited. The federal government is constantly pressuring more and more foreign banks to turn over information related to American account holders. Once US authorities have information that identifies you as the holder of an undisclosed foreign bank account, you are no longer eligible for the voluntary disclosure program. For more information on the program, please visit the Offshore Voluntary Disclosure Program page on our website.