What is Offshore Banking?

Are you considering placing an investment in an offshore tax haven? While you can protect your wealth, there is a lot of bad press around the practice—so what do you need to know?

An offshore account is a financial product offered in regions around the world. Banks and investment institutions offer accounts in their countries of origin and also in jurisdictions around the globe that are known for their low tax rate and regulatory ease. It is a legal and respectable practice if set up appropriately.

The term “offshore tax haven” refers to a location, jurisdiction, territory, or country where minimal taxes are charged on the investment. In the past, tax havens usually did not share a lot of information with governmental agencies with the aim of reducing tax liabilities in the home country of the investor.

As offshore banking has matured, some tax jurisdictions dropped their tax rates even lower, kept few records, and did no reporting. These secrecy jurisdictions have been outed as prime locations for tax evasion. As more wealth flows around the globe and drains into secrecy jurisdictions, tax fraud has become rampant, leaving countries with minimal tax coffers struggling to stabilize and serve their populations.

Another method used by Big Business has been relocating headquarters and opening foreign bank accounts in offshore tax havens to reduce or eliminate their tax burden. Good examples include Amazon’s European headquarters in Luxembourg and Apple’s headquarters in Ireland. Amazon did huge business in the EU in 2020 and paid zero corporate taxes.

Interest in offshore tax havens remains high for good reasons. Tax shelters work well in strategic plans aiming to place wealth in a protective entity in a location with a low tax rate. You may be able to avoid capital gains tax by placing wealth in a tax haven.

Your offshore options depend upon your investment aims. Offshore tax havens are not a one-size-fits-all solution—but require consideration attuned to your financial profile and current tax laws.

Reasons to Consider Offshore Banking Opportunities

Secret offshore tax havens get a lot of bad press. The Panama Papers and the Paradise Papers are investigative journalism projects based on high-level leaks of sensitive information about where the world’s elite stash their cash when they want to avoid taxes and unwanted publicity. Negative publicity about wealth held in secrecy jurisdictions to avoid taxes has ruined careers, triggered criminal tax charges, and generally exposed high-wealth individuals and companies who skirt regulations to earn or hide unreported income.

Despite the unfavorable media attention, it is important to know there are some very good reasons to place your wealth in legitimate offshore tax jurisdictions and foreign bank accounts. A destabilized economy in any country is a good reason to diversify your wealth in one or several safe harbors. Here are some reasons to consider an offshore account:

1. Asset protection: An offshore company or trust may be structured to legitimately protect the wealth of an owner from exposure to legal or tax actions.
2. Growth of wealth: Placing value in accounts that earn substantial interest is a good way to profit from your existing wealth.
3. Protection from instability: Fluctuating currencies, governmental action, and civil volatility are rife in the world today. An offshore account, depending on its location, can offer the stability that is not easily found in a home country.
4. Diversity: Wealth in various places, tools, and properties can improve tax opportunities and hedge against volatility in any one investment sphere.
5. Privacy: Structured trusts and companies offer privacy to well-known individuals who would prefer their financial dealings to remain private.

A foreign bank account or offshore company could be a smart addition to your wealth management portfolio, as long as you maintain compliance with U.S. tax regulations such as FBAR, FATCA, and other tax reports.

The Pros and Cons of Offshore Tax Havens

Offshore financial centers offer options to people and governments interested in protecting and growing their wealth. Some promote tax fraud, while others do not.

Tax havens can be found all over the world. Some are offshore, like the Cayman Islands, the British Virgin Islands, or Hong Kong. Countries like Switzerland, the Netherlands, and Luxembourg are also tax havens. A couple of very popular tax havens are stateside—in Delaware and Wyoming.

A tax haven, whether island, country, or state, can be developed in order to promote domestic and foreign investment and nurture long-term commercial growth. These tax havens may offer a lower tax rate to local and multinational corporations in order to attract their business. The tax rate offered may be regionally lower—but still competitive. The aim is to boost financial stability and improve economic security in the long term. This type of tax haven attracts and then generates economic activity.

Other tax havens, or secrecy jurisdictions, offer a very low tax rate or dispense with tax altogether. This type of non-competitive tax haven pulls clients and businesses from surrounding countries that have higher tax rates and greater compliance requirements.

Celebrities, large companies, and the wealthy are attracted to secrecy jurisdictions. In these settings, financiers set up shell companies that do no business other than to quietly and anonymously hold the assets and wealth of those wishing to hide their wealth. Investors pay little to no tax. Money moved between shell companies washes around the globe to lose association with its original source—which could be drug trafficking, criminal enterprise, or money stolen from governmental coffers.

Having a shell company is not illegal—unless the assets that it holds are. Shell companies are frequently named owners of expensive real estate, homes, yachts, or airplanes.

Problems arise when companies, countries, or individuals use shell companies to launder money or avoid taxes otherwise due in surrounding or distant countries. American big business is notorious for incorporating into low-cost European tax havens like Ireland and Luxembourg. While companies can claim they pay taxes, they are not paying taxes where they are legitimately owed.

Switzerland is well-known for its “secret” foreign bank accounts. For years, wealthy Americans avoided paying taxes on their wealth through numbered Swiss accounts. A strong push by the U.S. Treasury partly changed this longtime practice by requiring foreign banking institutions to annually file a Foreign Account Tax Compliance Act (FATCA) report on all accounts owned or held by American taxpayers. Similarly, American taxpayers with qualifying holdings in foreign banks must file a report of a Foreign Bank and Financial Account (FBAR).

The IRS compares these reports and levies significant fines and penalties on foreign institutions and U.S. taxpayers that fail to report their assets accordingly.

With greater compliance efforts, investigative journalism, and more buy-in from global tax agencies, the scope of illegal tax havens and their practices is becoming better known. Depending on your goals, there is a tax haven out there for you—be sure to speak with an experienced tax attorney to make sure you understand the big picture. 

Key Methods Billionaires Use with Offshore Tax Havens

It is no secret that the ultra-wealthy generally make use of tax-avoidance strategies. Paying less tax means more wealth accumulated. Recent information leaked from offshore tax havens reveals some of the ways the wealthy keep their money in the family and away from the U.S. Treasury.

Despite recent interest rate hikes and lost stock value, the ultra-wealthy remain in good condition in the U.S. A report from Inequality.org, an initiative of the Institute for Policy Study, suggests billionaires in the U.S. have seen a 50 percent increase in asset value since March 2020, the outset of the pandemic. While some of the very wealthy are investigated for tax fraud, many are using perfectly legal methods to protect their wealth.

The media famously reported that two of the wealthiest people in the world occasionally pay no federal income taxes in the U.S. Jeff Bezos paid no federal income tax in 2007 and 2011. Elon Musk paid no federal income taxes in 2018. Key methods by which the wealthy maintain their wealth include:

• Income differences: The income tax returns of the wealthy are considerably different from those of middle-class America. Capital gains, interest, and investment income can be creatively manipulated to reduce tax liability. Whereas most Americans pay taxes on their wages, money earned from investments can be routed in a way to mitigate or eliminate taxes on that money.
• Holding assets: The wealth of many individuals is tied to stock or real property. Instead of selling assets for income, high-asset individuals may take out low-interest loans using their investment portfolio as collateral. As loans do not trigger a tax liability, the wealthy can continue to accrue without paying significant taxes.
• Estate planning: Portfolio management and estate planning are critical to reducing or eliminating taxes, often through trusts and gifting strategies. These trusts allow the wealthy to maintain and build multi-generational wealth to avoid estate taxes.

A bill known as the “Billionaire Minimum Income Tax Act” was introduced in Congress in the summer of 2022. The bill would require households with over $100 million in worth to pay a minimum 20 percent tax on their full income. Upon introduction, Congressman Steve Cohen remarked, “It is time that billionaires chip in like everyone else to pay at least a base level of taxes. There is tremendous public support for this proposal, which will close loopholes in our tax code and ensure billionaires pay a fairer share. It's time to make the tax system fair."

While unlikely to be signed into law, the bill does highlight growing restlessness in the U.S. as the rich get richer—and the less rich pay tax.

The Global Economic Problem with Offshore Tax Havens

Generally, offshore tax havens project the allure of anonymity, exotic locales, and money—lots and lots of money. The real-time picture is different and draws its lines between those seeking a solid investment process and economy-trashing tax evasion.

As we said earlier, the purest view of offshore investment is one that provides legal tax advantages that legitimately cannot be obtained on home soil. Companies that locate headquarters in the region of a tax haven can oftentimes dramatically reduce their tax liability. Wealthy individuals, families, and foundations with a desire for privacy, wealth protection, and asset growth are great candidates for a tax haven strategy. The same goes for any company, startup, or individual looking to expand their interests and do so in a fairly anonymous way.

Overall, a solid tax haven provides security for funds (that may otherwise be unstable in a home jurisdiction), ownership privacy, and little to no taxation.

The opaque nature of tax havens and the use of foreign bank accounts is a draw for those seeking a discreet place to park funds for the short or long term. Yet, that opacity leads to disturbing practices by which the offshore world is more predominantly known today.

The most popular tax havens got that way through the competition with other jurisdictions to provide the best service and lowest taxes to multinational companies and basically any entity with wealth. As a tax haven, countries without a more remarkable means of support can become a magnet for international investment and financial and business exchange. Tax havens are often a win for investors and the community that grows up around servicing those investments.

But the opacity of those regional jurisdictions also muddies the view, giving a darker and well-earned reputation that tax havens carry today. 

Tax havens are an important playing piece in the global game of tax evasion. According to a 2019 report from the International Monetary Fund (IMF), tax havens defer between $500 and $600 billion from legitimate governmental coffers. The loss of tax revenue starves economies of money needed to serve citizens and grow and maintain stable infrastructure. Taxpayers, legitimate tax-paying businesses, and economies around the world are suffering increased damage from this long-term practice. As well, tax havens, shell companies, and tax evasion are commonly used by terror organizations to fund operations around the world.

For existing tax havens, like Ireland and some states in the U.S., reducing tax rates attracts business—but at a cost to neighboring regions and other countries. According to the Tax Justice Network, the top ten secrecy jurisdictions involved in tax evasion in the world include the British Virgin Islands, the Cayman Islands, Bermuda, the Netherlands, Switzerland, Hong Kong, Jersey, Singapore, and the United Arab Emirates.

In 2021, 131 countries signed on to an initiative that disrupts the way large multinational companies are taxed. Multinationals typically take advantage of countries with ultra-low tax rates to minimize or eliminate taxes owed in countries where they do business. The new initiative included a measure to impose a global minimum tax on untaxed foreign income. 

Tax havens have quickly risen as a global economic problem. Interested investors are wise to speak with an experienced tax attorney to understand compliance and other issues around offshore banking.

The Potential Pitfalls of a Foreign Bank Account

Whether you live abroad or stateside, there are advantages and disadvantages to using foreign bank accounts. Offshore accounts have advantages, including privacy, stability if your home economy is prone to destabilization, and access to funds while living abroad. While it sounds good, it is important to consider some of the complicating factors of foreign accounts.

Let’s walk through a few:

• Compliance: The IRS is interested in your money, wherever it is. You are responsible for taxes on income earned anywhere in the world. In order to track your assets and income, the U.S. enforces stringent compliance requirements on foreign bank accounts and the institutions that hold them. Enhanced compliance can make both you and your foreign bank nervous. In recent years, the long arm of the IRS has frequently reached abroad to levy penalties against institutions that do not comply with its reporting requirements.
• Reporting: Offshore financial compliance takes the form of detailed reports. Some of the reports you may need to file include the Report of Foreign Bank and Financial Accounts (FBAR) (Form FinCen 114), the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gift (Form 3520), and the Annual Information Return of Foreign Trust with a U.S. Owner (Form 3520-A).
• Penalties for non-compliance: The compliance requirements around foreign accounts are intended to defer tax fraud and tax evasion. Given the length of time reporting requirements have been in place, the IRS is not likely to consider lack of knowledge as a reason for failure to file annually the due reports. The distinction between a willful and non-willful mistake is critical. Penalties for non-willful errors are less severe and less likely to proceed toward an IRS criminal tax investigation.

For non-willful penalties involving missing FBAR reports, as of 2024, the maximum penalty is $15, 611 per violation. For willful violation of compliance rules around FBAR reporting, the penalty is 50 percent of the amount in the delinquent account or $156,107—whichever is greater. Despite the compliance hoops, a foreign bank account could help you with the service and wealth protection you are looking for.

Opening a Foreign Bank Account—How Does That Happen?

For a number of reasons, you may be interested in opening a foreign financial account. Stateside, it is pretty easy to open a bank account but offshore, it pays to know a little bit about the system.

We talked earlier about some of the potential issues involved with opening a foreign account. Overall, much of the difficulty around offshore accounts has to do with compliance—reports that must be filed with the IRS and fines that will be paid if they are not.

As you think about opening an account, remember those same issues pop up on the service side. Many foreign financial institutions no longer spend big marketing dollars trying to attract U.S. business because of the compliance system needed to service the account. With that in mind, consider these points about opening a foreign financial account:

• You do not have to have high wealth to open an offshore account. If you travel frequently, spend part of the year in another country, or find it worthwhile to protect and grow your assets in an offshore tax jurisdiction, it is perfectly legal to open an account abroad. When planning to open an offshore account, take the time to understand how you will open the account. You may need to visit or contact a special bank branch or unit for U.S. persons. You may need to make an appointment with a particular representative who is familiar with the process.
• As with any bank account, you will need to have your personal documents available. These include your passport, driver's license, and documents that prove your residency. While you may be able to use notarized copies of your documents, certification with an apostille stamp may be required as well. To discourage tax fraud, other papers may be needed.

• Because of stringent compliance issues, you may be asked about the nature of the business you intend to transact with your account and the source of the monies you intend to deposit. Before you protest, remember those compliance measures are directly aimed at deterring money laundering. Investigate exactly what is needed by the banking entity with which you would like to do business.
• When researching a bank to hold your funds, learn about fees and requirements for U.S. citizens. American citizens may have to pay a fee to open the account, higher service fees, and higher deposit requirements. With a larger institution, you may qualify to open the account stateside while having access to your account with an online app. If you are already residing abroad, you may be able to open an account using your current residence and foreign identity card. You may also be able to open an Expat account online, which gives you flexibility and access to your money while living abroad.

Banking abroad is a great option for some people. If you are living abroad or planning on it, remember that you will need to report all of your income earned—regardless of your location—to the IRS each year.

The Top 10 Corporate Tax Havens

Depending upon their use, corporate tax havens are a sensation or a scourge. Tax havens offer a low- or no-tax option for corporations and wealthy individuals looking to shelter assets from an unstable economy or as a tax buffer for substantial wealth. Tax havens can also be used to hide unreported wealth, facilitate money laundering, and perpetrate tax fraud.

The term “offshore tax haven” conjures visions of beachfront property and sunny idyl, and indeed, Bermuda, the Bahamas, Mauritius, and the Cayman Islands offer that sort of view along with favorable corporate tax rates and preferential tax laws.

But the most popular—and profitable—tax havens are those with the greatest opacity. Every two years, the non-profit advocacy group, the Tax Justice Network (TJN) publishes its Financial Secrecy Index. The Index compiles a list of jurisdictions with financially favorable regulations that attract foreign and domestic investors. TJN factors together secrecy, global use of the jurisdiction, and preferential tax treatment to identify the top secrecy jurisdictions for helping companies, groups, and high-asset individuals nurture wealth—and also illegally hide foreign bank accounts and circumvent legitimate tax liability owed elsewhere.

According to the TJN, the top ten performers as tax havens and secrecy jurisdictions on a global scale include:

1. The United States: The secrecy jurisdiction that ranks highest on TJN's list of enablers of global money laundering, tax crime, and preferential tax regulations is the United States of America. This is the first time the U.S. has taken the number one position on this index.
2. Switzerland: Forever associated with secret Swiss bank accounts, it is not too surprising to find the small country in the number two spot.
3. Singapore: Rising in popularity and profitability for years, Singapore does not assess taxes on capital gains and offers substantial tax breaks along with low corporate taxes.
4. Hong Kong: A zero tax rate on foreign income makes the region a highly desirable tax destination for wealthy individuals and corporations.
5. Luxembourg: Luxembourg offers preferential tax treatment to foreign investors and multinational companies.
6. Japan: Japan is another longtime tax haven eyeing legislation to close favorable tax loopholes.
7. Germany: Even as it investigates anti-tax haven legislation, Germany is a favorable jurisdiction for secrecy, with income and corporate-friendly tax laws.
8. United Arab Emirates: With a reputation for secrecy, UAE offers free-trade zones, low tax rates, and no taxes assessed on corporate income.
9. British Virgin Islands: With no taxes on offshore tax accounts and no tax treaties, the British Virgin Islands is a perfect getaway for hidden wealth.
10. Guernsey: Guernsey has long earned marks for its regionally controlled, and preferential tax laws as well as low to no taxes for corporations.

There are numerous global opportunities for high-asset individuals and corporations to shift cash offshore to nurture wealth and take advantage of favorable tax environments. Work with a tax attorney experienced with these jurisdictions to craft a profitable—and legal—strategy for your investment portfolio.

Be Aware of the IRS International Tax and Financial Crimes Group

IRS: CI has a unit that responds to specialized areas of tax crime. The International Tax and Financial Crime (ITFC) group focuses on fraudulent activity involving offshore tax holdings, financial institutions, and foreign bank accounts.

The IRS formed the ITFC in 2017. As part of the field office in Washington, DC, the unit is composed of special agents from across the country with expertise in international tax intrigue and tax evasion. Among others, the types of projects in which these agents engage include:

• Reducing tax evasion through the pursuit of foreign financial institutions (FFIs): In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA), a measure that requires foreign financial institutions to report holdings of U.S. taxpayers to the IRS. The Swiss Bank Program was initiated in 2013 through the work of the IRS and the Department of Justice (DOJ). At the time, and still today, Swiss banking interests sometimes offer services to U.S. taxpayers that help them to avoid their tax liability. Typically, the IRS enters into non-prosecution agreements in exchange for compliance with U.S. regulations. The agreement requires each institution to completely disclose cross-border transactions and provide detailed information on accounts owned by or associated with, U.S. taxpayers. The strident efforts of the IRS in this regard have tightened services provided abroad to U.S. taxpayers, due to the heightened requirements on banks to ensure all information is disclosed to the U.S. Treasury.
• Offshore tax investigations: According to the IRS, the ITFC also “works to identify and investigate enablers, financial institutions, third-party asset managers, promotors, referral agents, and expatriated U.S. citizens, who utilized international jurisdictions to effect tax fraud.” The ITFC engages in partnerships with the Department of Justice and the United States Attorney’s offices to investigate offshore tax fraud, tax evasion, and money laundering.

The ITFC also works with the Joint Chiefs of Global Tax Enforcement (G5), a joint effort between the U.S., Australia, the U.K., and the Netherlands. The group was formed to create a larger information and enforcement network to battle money laundering. Following a series of document leaks several years ago that revealed the real scope of illicit money being funneled around the world, the G5, along with the ITFC and other partnering agencies, agreed to collaborate to battle global tax crime.

Staying Compliant With Offshore Tax Investments

It begins with compliance. Compliance is important for realizing the full benefits of offshore investments. Let’s take a look at some relatively easy ways to stay on the right side of the law when considering or maintaining foreign bank accounts or holdings.

Cross-border and international investment strategies can help you save and grow your wealth. There are a number of reasons to consider offshore accounts, including preferential tax rates, privacy concerns, the desire to shelter assets in a relatively stable environment, or interest in international investments operating with a different form of currency.

It is not difficult to go astray when holding assets in a foreign country. The potential for a tax crime, evasion, and tax fraud that occurs in many offshore secrecy jurisdictions is well known. New investors may not take a hard look at compliance before setting up accounts—or—seasoned investors may just wish to look the other way.

Either way, the regulatory net around foreign investing is tighter than it used to be and it is a good idea to keep compliance in mind. Here are some quick tips:

• Report of Foreign Bank and Financial Accounts (FBAR): Annual FBAR reporting is critical to maintaining compliance with the IRS. Filing FinCen Form 114 is required for U.S. persons with a financial or signatory interest in foreign funds that exceed (in the aggregate) $10,000 at any time during the reporting year. An FBAR report is due annually on April 15, Tax Day. That said, an automatic extension is applied to allow submission of the report by October 15 without application or penalty.
• The Foreign Account Tax Compliance Act (FATCA): It is important for offshore investors to understand that their FBAR report is not the singular reporting tool reviewed by the IRS. FATCA requires foreign financial institutions to report holdings of U.S. taxpayers annually. In order to avoid a civil audit or other criminal tax investigation, U.S. taxpayers with a higher aggregate investment sum must report assets on Form 8938, for “Specified Foreign Financial Assets.”
• Additional reporting requirements: Depending upon your investment portfolio, the IRS may require the submission of additional forms. Ownership in a foreign interest (Form 5471) and receipt of a gift from a foreign trust (Form 3520) are just two special instances for further scrutiny when setting up your compliance protocol. 

Your Annual FBAR Report

Filing your Report of Foreign Bank and Financial Accounts (FBAR) is an annual requirement. Since 1970, the Bank Secrecy Act decrees that certain U.S. persons must file an FBAR report. Your FBAR report is due in April but is not bundled with your federal income tax return. While your tax return will report income earned from your foreign bank accounts, the FBAR provides identifying information on assets in which you have an interest that resides outside of the country.

If you are new to foreign holdings, you may not have filed an FBAR in the past. An FBAR is required in the following circumstances:

• A U.S. person who has signature authority, financial interest, or ownership over one or more foreign accounts may need to file an FBAR.
• An FBAR is required if the value of any one or all of your offshore tax or other accounts exceeds $10,000 at any time of the year. It is a common mistake to assume the value threshold is only considered at the conclusion of the calendar year. As well, this means if the aggregate value of three smaller accounts exceeds $10,000, an FBAR is required.
• Jointly owned foreign assets that meet the threshold requirement must be reported by each party with signature authority or ownership of financial interest.  
• In most cases, spouses are not required to file a separate FBAR.

On your FBAR, you will need to calculate and report the greatest value of monies or other assets held by foreign entities during the year in U.S. dollars. 

Filing an FBAR is an easy way to stay in compliance and help yourself steer clear of an IRS civil tax audit. Although filed at approximately the same time as an annual tax return, the FBAR is filed through the Financial Crimes Enforcement Network’s (FinCen) website.

Plus, it is a good idea to maintain compliance with FBAR reporting. Forgiveness programs once offered by the Internal Revenue Service (IRS) have lapsed. Penalties for non-filing can be wicked and break the difference between willful and non-willful filing. As of 2024, the current maximum penalty for non-willful (accidental) non-filing of an FBAR is $15,611 per event. For a purposeful avoidance of filing or willful non-filing, that penalty jumps to $156,107 or 50 percent of the account value, whichever is greater. Given that the requirement for FBAR reporting is well-established, proving a non-willful filing can be a difficult feat to accomplish.

What is the FATCA Report?

While both FATCA and FBAR arise due to the transfer or holding of assets abroad by U.S. taxpayers, the similarity ends there.

The Foreign Account Tax Compliance Act (FATCA): report is not the responsibility of the U.S. taxpayer, but of the foreign institution that holds the financial account. The IRS program requires financial entities in foreign countries to provide information to the IRS on accounts owned by persons with ties to the U.S. Among other factors, an association with the U.S. is triggered when funds are transferred to an American account, a U.S. resident owns, has signature authority, or power of attorney on a foreign account, or if the owner has U.S. contact information or was born in the U.S.

Both FATCA and the FBAR try to plug the leaks when money from the U.S. flows to foreign financial institutions and back without taxation. By comparing reports, the IRS can identify when there is a failure to file on either the part of the taxpayer or the foreign financial institution—potentially triggering an IRS audit, and if warranted, money penalties.

In recent years, the IRS has maintained robust enforcement against U.S. persons who do not file FBARs and institutions that fail to file FATCA reports. In either case, the penalties and settlements are high.

FBARs: The Importance of Understanding Nonwillful Conduct

The IRS has a longstanding interest in the pursuit and prosecution of those who commit tax fraud through offshore tax dodges. The National Taxpayer Advocate recently reviewed how the IRS and the courts consider penalties for failure to file appropriate FBARs.

Since 1970, FBAR filings have been required of U.S. persons who have offshore financial interests or foreign bank accounts that meet a threshold for reporting to the IRS. Initially, few investors understood the Bank Secrecy Act and its attending FBAR requirement. Today, the IRS assumes those who have offshore holdings are legally sophisticated and able to understand their own regulatory reporting requirements.

Yet—it is not always the case that a taxpayer with foreign holdings understands the requirement—or the penalties involved in failing to file an FBAR. The specifics about who does—and who does not—need to file an FBAR can get detailed. Basically, a U.S. person with authority, ownership, or an interest in a financial account outside of the U.S., and whose holdings exceeded $10,000 at any time of the year, is required to file an FBAR.

A review from the National Taxpayer Advocate (NTA) discusses the reporting requirement as well as the potential for the IRS to step over its boundaries in assessing penalties to those who do not file a required FBAR. The distinction made by the NTA is drawn between taxpayers who are willfully abusing the system and evading taxes, and those who have unwittingly, and unwillingly, made a mistake.

In a recent case considered by the U.S. Supreme Court (SCOTUS), the IRS pursued penalties against a taxpayer, Alexandru Bittner, who had not known about the FBAR reporting requirement until he returned to the U.S. from Romania. At that time, Mr. Bittner filed five FBAR reports for 2007 through 2011. Overall, Mr. Bittner had 272 different accounts which he reported on in different years. While the IRS did not claim that Mr. Bittner’s belated accounting for his foreign accounts was willful—the IRS still sought to attach a $10,000 penalty to each account—not to each of the five reports. By doing so, the IRS expected a $2.72 million payday. Instead, SCOTUS decided the penalty could be assessed per report—not per account.

In this case, the IRS sought full penalties, as defined by the IRS, to punish Mr. Bittner, who all agreed did not willfully avoid his duty to report. SCOTUS held differently and pushed back against the IRS.

Understanding Your Obligation to Report Offshore Funds

Is failure to file disclosures of offshore tax a criminal tax crime? It depends.

The pursuit of unreported offshore holdings of U.S. persons has been a priority of the IRS for some time. Tax evasion and money laundering are global problems that deprive governments and communities of legitimate tax revenue as well as fund illegal interests and organizations. 

We write often about the reporting required by the IRS, including FBAR and FATCA reports. These tools give the IRS the ability to compare what a person paying taxes in the U.S. discloses to the agency, and what the institution housing the foreign bank account reports. The difference can become the focus of an IRS audit. 

While FBAR reporting has existed for decades, the IRS only undertook strong enforcement efforts in the past ten years or so. The IRS now presumes that anyone with an interest in foreign assets is also aware of their obligation to report the account if it meets threshold requirements.  

Most people understand that failure to file an income tax return, or filing a fraudulent tax return can cause problems. While failure to file is a problem of omission, filing a false tax return is an act of commission. You can become non-compliant for not filing an FBAR, but that does not move you immediately into the territory of a criminal tax charge. While willfully submitting an FBAR that does not accurately reflect your financial standing creates an easier path toward an IRS criminal investigation, there remain programs within the IRS to voluntarily disclose unreported foreign assets that can help you avoid criminal penalties. 

Gaming the system to find out how long you can underreport or fail to report foreign bank accounts to the IRS is a bad idea. The penalties and fines that accompany willful FBAR infractions can erase $100,000 of your holdings or 50 percent of all undisclosed accounts. As noted by the IRS, “Civil monetary FBAR penalties have varying upper limits” depending upon the facts and circumstances of the matter. 

If you are in arrears on your FBAR reporting or know that you have undisclosed foreign assets, work with a tax attorney experienced with IRS criminal defense. Your lawyer can steer you toward disclosure programs that help you remain civil and avoid criminal sanctions.

The primary motivation of the IRS is to drive compliance, but the IRS does not shy away from enforcement. Notes IRS Commissioner Chuck Rettig, “Our Criminal Investigation and civil enforcement teams work closely with the Justice Department in the international arena to ensure our nation’s tax laws are followed. Taxpayers considering hiding funds or assets offshore should think twice; the civil penalties and criminal sanctions can be severe.”

Not Offshore Tax Compliant? Consider IRS Streamlined Procedures

Non-compliance happens. Whether as an accidental American or a U.S. taxpayer with surprise foreign holdings, the Internal Revenue Service offers streamlined procedures to allow taxpayers to become current on filings involving foreign bank accounts—and take advantage of terms for resolving penalties and taxes owed as a result of non-compliance. Essentially, the procedures are a channel toward compliance that can avoid help avoid IRS prosecution for failure to file your FBAR.

While streamlined compliance procedures can move a taxpayer toward compliance, eligibility for the program is limited. Here are some of the main criteria:

1. Attest to non-willful tax avoidance: The IRS streamlined process applies to non-U.S. residents (accidental Americans) and U.S. residents. A prime eligibility requirement is that the applicant certifies the behavior that allowed the lapse in compliance was not willful. Before you pass that one off, carefully consider the factors that led to your failure to file your FBAR.

Perhaps you live abroad and only became aware of the requirements for U.S. tax reports on foreign holdings. It makes sense you would look for a channel to become compliant. If, however, you certify that your delinquency was non-willful, and the IRS takes a closer look into your accounts that say otherwise, you could be prosecuted by the IRS. Think about the question before you attest to your answer.

The IRS considers non-willful conduct to include “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

The IRS also offers a Criminal Investigation Voluntary Disclosure Practice for taxpayers who are concerned, or already know, that their non-compliance in filing an FBAR was due to willful conduct. If considering this option, speak with an experienced criminal tax defense attorney about your situation before moving forward.

2. Under investigation? If you are already the subject of an IRS criminal tax investigation or a civil tax audit for failure to disclose foreign assets, you are not eligible to use the streamlined reporting procedures.

3. Taxpayer ID needed: To use the streamlined procedures, a taxpayer identification number is needed. For most individuals, this would take the form of a social security number. The streamlined process is not available to those without a social security number or individual taxpayer identification number (ITIN). That said, a taxpayer may be eligible for the streamlined processes if their submission is accompanied by a completed application for an ITIN.

The penalties for failure to file an FBAR are serious. If you know you are non-compliant, talk to your tax lawyer about whether one of the IRS streamlined compliance processes would be helpful in your situation.

Multi-National Companies: What Do They Face?

Strategies to reduce or eliminate taxes for companies that operate globally have been in play for years. In the past decade, Big Tech, Finance, and Pharma have become stand-out examples for critics of businesses that establish their headquarters and subsidiaries offshore to manipulate their tax rates.

As we have discussed in the past, the use of these strategies by Amazon, Apple, and many other companies effectively reduces corporate tax burden as it starves countries of needed tax income. For several years, discussions around the regulation of multinational companies have advanced and faltered. With 130 countries now backing a draft framework for global regulation of these companies, the possibility of a standard tax rate is looming large in the window.

The framework is sprawling but essentially means that companies will pay taxes to countries where their products or services are sold—regardless of whether the company has a physical presence in the country or region. Previously, a company might locate its headquarters in Ireland, which is known for its friendly corporate tax philosophies. The company would then pay rock-bottom taxes in Ireland, while at the same time earning big money from consumers living in other countries.

A tax rate of at least 15 percent could effectively end the use of foreign jurisdictions like Ireland, Luxembourg, and many others, as a sole strategy for tax avoidance. With a corporate tax rate of 12.5 percent, Ireland is one of the countries that has, so far, refused to sign the agreement. Hungary and Estonia have also remained out of the agreement.

While gaining approval from participating countries will not be easy or fast, gaining a tentative agreement on a tax rate and structure that benefits every country that does business with multinationals is a very big deal.

Flashback: The Panama Papers and the Pursuit of Foreign Bank Accounts

In 2016, an investigative expose into the opaque world of offshore tax deals shook global halls of governance and woke up the world to the concept of dirty money. What has happened since? 

That year, the International Consortium of Investigative Journalists (ICIJ) began publishing articles based after a year of analysis on more than 11.5 million documents leaked from the now-defunct Panamanian law firm Mossack Fonesca. The ongoing articles take a deep dive into the means by which enormous sums of money flow into secrecy jurisdictions to avoid detection and taxation.

Make no mistake—the use of offshore tax havens is a legal business practice that can support wealth growth and protection when set up within regulatory and reporting guidelines. Our firm advises clients on compliance and offshore tax practices that augment other wealth strategies—without incurring the risk of prosecutorial action by the Internal Revenue Service (IRS).

The leaked Panama Papers point to the wrong kind of offshore tax practice—wealth that is quietly moved through shell companies around the world into opaque tax havens for the purpose of evading taxation. The Panama Papers were the first of several other investigations undertaken by the ICIJ to put names, faces, and dollar amounts to the global habit of stashing cash and avoiding taxes. A 2016 estimate puts the amount of money lost to this practice in the trillions of dollars.

Since 2016, the battle against illicit offshore tax havens and associated practices has gone mainstream. When the media reports broke, waves of protest rose against financial entities and individuals named in the reports. Around the world, regional tax enforcement agencies opened investigations, many of which have since concluded in guilty pleas for tax fraud. In the U.S. and elsewhere, legislation is pending to reduce the abuse of tax havens. By 2019, 23 countries had retrieved approximately $1.2 billion in taxes.

The Panama Papers scandal put financial institutions, corporations, and taxpayers who commit tax crimes on notice, and the fallout has shut down some players. But far more work lies ahead to strengthen global regulations to reduce tax evasion. For U.S. taxpayers, that means robust attention to accurate FBAR submissions.

In 2017, the ICIJ won a Pulitzer Prize for “using a collaboration of more than 300 reporters on six continents to expose the hidden infrastructure and global scale of offshore tax havens.” To underscore the importance of this sea change, in February 2021 the ICIJ was nominated for a Nobel Peace Prize. The nomination letter reads:

The outstanding work of the ICIJ to expose illicit flows, and the mammoth achievement of the GATJ to build national and international pressure for accountability and fair taxation — warrants attention, recognition, and support…They are, independently and by different means, trailblazers in creating a world where financial incentives for conflict, wars, human rights abuses, and violence are non-existent. These courageous journalists and civil society organizations play a critical role in documenting corruption and Illicit flows, often while putting their lives in peril in the process.

Enough said.

Indicted: A Case Study in Hidden Offshore Tax Intrigue and Tax Evasion

A Florida man was arrested in September 2021 on criminal tax charges that stretch around the world.

Born in the states, Mark Gyetvay is a CPA and the longtime CFO of Novatek—the largest, non-state-owned gas producer in Russia. His tenure with Novatek began in 2003, after he had worked as a CPA in the U.S. and Russia for a number of years. To skirt U.S. sanctions imposed on Russia in 2014, Russian President Putin gave Russian citizenship to Mr. Gyetvay.

As part of his compensation package with Novatek, Mr. Gyetvay earned stock-based benefits. According to the Department of Justice (DOJ), Mr. Gyetvay eventually opened two Swiss bank accounts to hold these assets. The DOJ states the value of the offshore tax accounts eventually stood at around $93 million.

Between 2005 and 2016, the DOJ alleges Mr. Gyetvay took several steps to hide and dissuade authorities about his ownership of the foreign bank accounts. At one point, he named his wife at the time, a Russian citizen, as the owner of the accounts. The DOJ notes Mr. Gyetvay is himself a CPA, making it difficult to argue ignorance, rather than indifference, of regulations surrounding the reporting of many millions in assets.

During the same period, Mr. Gyetvay failed to file U.S. income tax returns and when he did file, he filed false tax returns. Although the penalties for failure to file FBAR reports are high, Mr. Gyetvay also neglected to submit those reports while at the same time filing a false compliance report through the Streamlined Filing Compliance process with the IRS. During that process, Mr. Gyetvay attested that his failure to file tax returns and FBAR reports was non-willful. The IRS gets very testy with customers that it knows are willfully engaged in tax fraud and purposefully ignoring FBAR reports—and it imposes draconian penalties to prove it.

The Russian News Agency, TASS, reported Mr. Gyetvay, who holds both U.S. and Russian passports, was released on $80 million bail. Kremlin spokesperson Dmitry Peskov has stated Moscow is not likely to interfere in the U.S. matter as Mr. Gyetvay holds citizenship in both countries.

Said Mr. Gyetvay, “…I was indicted for baseless tax charges that I already settled through a voluntary program, and pleaded not guilty. I will vigorously fight these charges and will continue to discuss gas topics as normal.” Let’s hope the charges are baseless, if unsuccessful in fighting the charges, Mr. Gyetvay could be looking at 20 years in prison.

The Largest Leak of Offshore Tax Crimes: The Pandora Papers

In 2021, a document trove containing approximately 11.9 million records was leaked to the International Consortium of Investigative Journalists (ICIJ). Dubbed the “Pandora Papers,” disclosure of the documents continues to disrupt the opaque world of offshore finance. 

Following on the heels of the Panama Papers document leak in 2016, and the Paradise Papers in 2017, the Pandora Papers represented the largest leak of offshore tax and financial documents of the three. The 2.94 terabyte leak from an unknown source includes documents from 14 businesses that service wealthy individuals, entities, and governments with their offshore holdings. The documents come from law firms, financial managers, and corporate service agencies and literally contain a wealth of information about offshore economics and how the rich get richer.

Since these document leaks, investigations have been ongoing into businesses, trusts, and persons who stash their cash in low- or no-interest tax jurisdictions at the expense of the tax rolls where the owner of the asset lives, or where the asset is located.

Recently, the German state of Hesse appears to have purchased the entire set of Pandora Paper from an unknown source. The ICIJ does not sell or reveal the sources of its document sets. The Hessian Finance Minister, Michael Boddenberg notes early review of the document set reveals there are “cases worthy of examination.”

Although the price paid by Hesse has not been revealed, the intention of the jurisdiction seems clear. Boddenberg reflected, “If there are indications of tax crime, we will follow them up with all the means available to us. We have already informed all federal states and the federal government about the purchase of the Pandora Papers. Investigators from all over Germany and other EU countries can now contact [us] with inquiries.”

The Pandora Papers is purported to cover five decades of financial subterfuge and names more than 29,000 owners of offshore tax holdings. These owners include celebrities, athletes, royals, politicians, and the uber-wealthy. In the purchase of the data set, Hesse has positioned itself to collect a tidy sum from those who are named within and are found to have evaded taxes. Similarly, the British Revenue and Customs agency has delivered notices to those named in the Pandora Papers to settle up or else.

It seems likely that the wealthy wish to quietly remain that way. Headlines may be reserved for those who refuse to pay their tax debt and will probably be publicly exposed for their practices. We will have to wait and see.

Credit Suisse Goes Down For Offshore Tax Schemes and More

Embattled Swiss bank Credit Suisse is down for the count. The Zurich-based bank is being purchased by UBS, a longtime competitor of Credit Suisse and the largest bank in Switzerland.

We have discussed the increasingly beleaguered state of Credit Suisse. Involved in offshore tax schemes and other flavors of tax crime and evasion, Credit Suisse has been a frequent bad news headliner. The weakened position of the venerable 166-year-old bank, coupled with the volatility of the current economic climate, triggered the Swiss government to broker the deal to bail out Credit Suisse.  

The deal is intended to calm financial fears around the condition of Credit Suisse and the Swiss banking system. While it is a good deal for UBS, which is paying $3.2 billion for a company with a much greater market value, there remain hard reconciliations ahead. Recently, the Swiss Financial Market Supervisory Authority (FINMA) stated that $17 million worth of tier-one bonds (AT1) held by Credit Suisse will be written down—to the severe consternation of investors who hold those bonds. As well, the large size of UBS may make it harder for Swiss regulators to influence the institution going forward, dealing a blow to the aura of Switzerland as a European financial leader.

Despite regulatory actions, penalties, and efforts to rehabilitate its reputation, Credit Suisse has not found solid ground in recent years. The bank has been involved in documented dubious doings since the 1940s. Later, Credit Suisse provided foreign bank accounts for those seeking preferential tax settings and anonymity. Later investigations reveal, however, that Credit Suisse catered to drug cartels, organized crime, and other investors to which it was obliged to investigate and report. Instead, the bank overlooked its investigative and regulatory requirements. The reputation and capabilities of the bank grew progressively more tarnished.

It is uncertain whether Credit Suisse could have found firm footing again. UBS will incorporate its valuable units and assets and dispose of the rest. UBS has already announced it will reduce the combined workforce of UBS by 20 to 30 percent in the coming months and years. The move is expected to reduce costs by $8 billion by 2027. The layoff is expected to include about 11,000 jobs in Switzerland. At present, the workforce of the combined banks is approximately 125,000 worldwide.

The takeover of Credit Suisse will reverberate for years. Offering valuable services in the wrong way ultimately led to its downfall—which may have a long-term impact on banking in Switzerland. 

Recent Legal Rulings on FBAR Matters

Two 2021 court rulings drive home the need to pay careful attention to FBAR filings—and the penalties that accrue if they are ignored.

Court rules on penalties assessed for failure to file FBAR

In the matter U.S. vs. Frank Giraldi, the court sided with a taxpayer who did not file FBAR reports on foreign bank accounts from 2006 through 2009. At 89 years of age, Mr. Frank Giraldi had four offshore accounts, three of which were tax-deferred annuity accounts for the benefit of the spouse of Mr. Giraldi, who is considerably younger than Mr. Giraldi.

In 2014, Mr. Giraldi took advantage of the IRS voluntary disclosure program for offshore tax accounts. He later withdrew from the program. The penalties applied by the program were significantly higher than the normal fine Mr. Giraldi would pay for failure to file the tax reports. Two years later, the IRS assessed him with a penalty for failing to file on each account for each year he was in arrears.

A District Court judge ruled in favor of Mr. Giraldi, noting the taxpayer should pay only one penalty ($10,000) for each year that he did not file. This reduced the amount owing by Mr. Giraldi from $160,000 to $40,000.

Court affirms lower court ruling assessing significant fines for willful failure to file FBAR

In the matter of the U.S. vs. Peter and Susan Horowitz, the Court of Appeals affirmed a lower court finding that a couple recklessly disregarded the FBAR requirement on their foreign bank accounts.

Mr. and Mrs. Horowitz are successful professionals who moved to Riyadh, Saudi Arabia in 1984 in order for Mr. Horowitz to take a job as an anesthesiologist at King Feisal Hospital. Mrs. Horowitz has a Ph.D. and found work that supported the couple, allowing them to mostly bank the earnings of Mr. Horowitz. In time, the couple opened a Swiss bank account for their savings, while continuing to report and pay U.S. taxes.

When the couple returned to the U.S. in 2001, they maintained their Swiss account which had accrued $1.6 million. Once back in the U.S., the Horowitzes waited until 2010 to apply to the Offshore Voluntary Disclosure Program. Thereafter, they filed their FBARs along with amended tax returns for select years. Given the amended returns, the couple paid an additional $100,000 in back taxes.

The Horowitzes did not report their offshore account to the accountant who prepared and filed their taxes each year. In 2014, the IRS corresponded with the couple about penalties due. When an agreement could not be reached, the IRS filed suit against the couple.

The Appeals court affirmed a lower court finding that Mr. Horowitz owes $654,568 in enhanced penalties and Mrs. Horowitz owes $327,284 for failing to file their FBARs.

The Cowboy Cocktail—How Wyoming Became a World Class Tax Haven

The Cowboy Cocktail is not an interesting after-hours beverage. It is a potent combination of a made-in-Wyoming trust added to often unregulated, infrequently scrutinized private companies. The Cowboy Cocktail put Wyoming on the global leaderboard for opaque not-really-offshore tax havens.

The Cowboy Cocktail was a well-hidden non-secret until early 2022, when an expose’ from the International Consortium of Investigative Journalists (ICCJ) laid out the facts. The ICCJ was drawn to the 44^th state by revelations unearthed in the Pandora Papers, a trove of approximately 11.9 million records that details the lengths to which the world’s wealthy go to hide wealth in shell companies, trusts, and other structures that may, or may not, have a whiff of tax fraud to them. 

While it may seem odd to consider Wyoming a sought-after offshore tax option for dictators, oligarchs, and their closest friends, Wyoming was recently named one of the friendliest tax shelters in the world. Wyoming is not alone in the U.S. for its come-hither financial ways. Nevada, Alaska, South Dakota, and Delaware have all been named by the EU as “hubs of financial and corporate secrecy.” 

Notes Josh Rudolph, formerly with the National Security Counsel in the Trump and Obama administrations, “For some time now, the U.S. has been the weak link in the international anti-money laundering regime. The European Parliament is absolutely right—we are the enablers.”

Here is how the Cowboy Cocktail works:

• Wyoming provides two trust options for those with assets of usually $100 million or more. One option is regulated, according to the ICCJ, which helps investors avoid unexpected tax bills or other inspections. The other trust is unregulated and allows families to place control of the trust in a private, family company. Currently, there are seven regulated private companies using the Cowboy Cocktail in Wyoming and an unknown number of unregulated companies.  One estimate places the creation of private, unregulated companies in Wyoming at 100 per year. 
• Investors have the option to place their assets in a trust—or in a company (regulated or unregulated) that will control the assets in the trust. Together, the trust and the limited liability company offer wealth protection and opacity. 

Over the years, Wyoming legislators have continued to refine state laws to ensure investors could remain anonymous and their assets hidden, although Wyoming reaps little tax profit from the deals. Legislative refinements to the process are referred to as “Wyoming home cooking.” As noted in the ICCJ pieces, the arrangement is a winner. “A Cowboy Cocktail is a double-barreled approach to asset protection that may be the best thing since sliced bread.”

High Flying Tax Advisor Arrested for Celebrity Tax Evasion

The long arm of the IRS tagged a Dutch tax professional in Italy for return to the U.S. to face charges of tax fraud involving high-net-worth celebrities.

A Dutch citizen, Mr. Frank Butselaar, was arrested in March at his Italian holiday villa. Since then, he has been under house arrest on the charges. Officials rearrested him in July for extradition to the U.S. Opinion is that the U.S. sought his arrest in Italy because of more comfortable extradition agreements between the U.S. and Italy than between the Netherlands and the U.S. But why the fuss?

According to the IRS, Mr. Butselaar advises high-asset clients all over the world. Some of his well-heeled clientele are fashionistas, music industry professionals, and celebrities. The Feds allege Mr. Butselaar developed a method by which his clients concealed assets earned outside of the U.S.—and thus avoid U.S. taxes on the largesse.

It’s common knowledge that the IRS does not look kindly on those who ignore their duty to report offshore tax holdings and foreign bank accounts. Basically, Mr. Butselaar bought into the shell game. Empty offshore shell companies were created and controlled by family beneficiaries and held by trusts that concealed millions of dollars.

The media identified two of Mr. Butselaar’s clients as Dutch disc jockeys Nick van de Wall (also known as Afrojack) and Tiesto Verwest. Tiesto has an estimated net worth of $170 million, while Afrojack enjoys an estimated $60 million. The two DJs are well-known in EDM circles. Mr. Butselaar is also alleged to have worked with fashion industry personnel, setting up offshore companies to funnel money and avoid taxes.

Noted U.S. Attorney Damian Williams, “As alleged, this defendant and his co-conspirators devised strategies to file false and fraudulent returns with the IRS for U.S. taxpayers of incredible means.”

Interestingly, work on this investigation involved IRS: CI and the Joint Chiefs of Global Tax Enforcement (J5). Mr. Butselaar is charged with one count of conspiracy to defraud, and five counts involving filing false tax returns. Overall, the defendant could be looking at 20 years of prison time—but will likely face less.

With tax defense attorneys already retained, it will be interesting to see what can be achieved through legal negotiation on behalf of Mr. Butselaar—or whether he will go to trial on the charges. Time will tell.