One of the major drawbacks of the internet is the proliferation of false information. If you look at various forums or blogs you will see quite a bit of them explain how it’s nearly impossible for US citizens to open and maintain offshore bank accounts, investments accounts, and various other financial resources.
While things have changed over the years, the truth is that US citizens are free to open accounts outside the country’s borders.
The myth however is not completely baseless; the US government instituted the Foreign Account Tax Compliance Act, commonly known as FATCA. To summarise FATCA, it orders all the banks that want to be part of the US financial system to become unpaid informants to the Internal Revenue Service (IRS).
Many of the foreign banks refused to do so and this doesn’t mean that banks have decided to support tax invasions or money laundering. While many of these banks were happy to comply with IRS inquiries, FATCA placed a whole new burden of responsibility on them.
So, certain banks simply didn’t want that hassle that came along with FATCA and closed their doors to US citizens and permanent citizens.
After FATCA, the offshore industry seemed to have blamed FATCA as the reason that US citizens can’t open offshore bank accounts. After FATCA, this myth was spread everywhere in various blogs, forums, e-books, and many more.
It was widely believed that FATCA was the US government’s way of preventing its citizens from banking overseas.
Offshore banking is completely legal and possible. A handful of banks might have withdrawn themselves from serving US citizens but most of the offshore banking institutions have complied with FATCA in order to maintain healthy relations with their US clients.
What is an offshore bank account?
Basically, an offshore bank account is any financial account that is based in a country outside where you hold citizenship. In the case of an American citizen, this means establishing and maintaining a checking, savings, investments, or any other type of financial account with a bank that is based and operates outside the jurisdiction of the United States.
Offshore banks welcome clients who would readily identify as middle class in terms of economic status. And this is the reason that offshore accounts became attractive to people who are looking to establish financial reserves for their future.
The major question is why would anyone consider opening an offshore account instead of a domestic one?
The answer is that offshore accounts offer higher interest rates to checking, saving, and deposit accounts. When you plan to invest money in the long term and wish to see it grow over time, you can earn benefits from offshore accounts.
Are offshore investment accounts similar?
Like most of the accounts, the offshore Investment accounts are similar as well. They have the same general principle which applies to every investment account. However, if they reach a particular specified value, then the activity needs to be reported to the IRS.
Depending on the nature of the account, you might have to file IRS Form 3520. The proper name of the report is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. It might be necessary to fill up IRS Form 3250-A or the Annual Information Return of Foreign Trust with a US owner.
These forms shouldn’t be the cause of not opening an offshore account; the tax forms themselves are very difficult as well. To assist you further, the financial institutions where you are planning to invest will be happy to help you so that you can gather the information required to fill out the necessary forms.
Are there any penalties for failing or not filing the IRS forms?
If you are required or asked to fill any of the forms mentioned above, you must ensure you fill them and provide the accurate required information.
If you fail to file the forms or leave out any required information, then you risk being charged with a penalty.
The charges depend on the errors or omissions. However, these charges could be as much as 35% of the funds you are investing. You might also face charges on your domestic salary or can have court-ordered deductions from your local bank accounts.
Compliance of FATCA and offshore bank accounts
When the FATCA was passed, there was a theory formed that the offshore accounts might stop doing business with US citizens. However, not all of the banks turned away. Offshore banks in various nations decided to adjust their reporting and client support to be in full consent with FATCA.
If you are an offshore account holder and wondering what this means for you, then you just simply need to understand that you might have to file another form or two when the tax season rolls out. And to help you, the offshore banks where your accounts reside have all the mechanisms to provide you with the required information. They will tell you if you have to file the forms or not.
Should I open an offshore bank account or not?
If you are a US citizen, then you might know that most US citizens continue to enjoy the benefits of offshore bank accounts legally.
If you are planning to grow your finances and want to earn a better interest rate then offshore accounts remain a great option. These accounts can be considered as one more method that will help you to build your wealth and provide financial security in the coming years.