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Do Offshore Banks Report to IRS?

Offshore banking that implies setting up offshore bank accounts basically means you keep your money in a bank account outside of your jurisdiction of residence, regardless of whether you are an individual or a legal entity. With an offshore bank account, a holder thereof enjoys multiple perks: their funds are sheltered from any financial crisis and they themselves benefit from high confidentiality. The fly in this ointment is that offshore banking transactions may be subjected to scrutiny on the part of tax authorities, with the IRS in the USA and other national tax services among them. 

The question of whether offshore banks shall report to the IRS is a multi-faceted one. The answer you’ll get depends on multiple variables like the national legislation in your bank’s jurisdiction, international agreements, and residence jurisdictions of offshore bank customers.

IRS

IRS and global tax administrations on a crusade against offshore banks

Lately, international tax administrations have kept a close eye on offshore tax payments trying to prevent tax evasion. A number of steps were taken to improve offshore bank reporting systems and make them more efficient. 

In the US, the FATCA law was adopted demanding that offshore financial institutions report US taxpayer info to the IRS, if such taxpayers have offshore bank accounts. Failing to do it, offshore banks at fault face heavy fines. The latter may go as high as 30% of their US turnovers. This means, as many as 300,000 offshore banks from 110 jurisdictions report to the IRS.

The rest of the world introduced the Common Reporting Standard (a.k.a. CRS) as a FATCA analogue. Thereunder, banks from over 100 jurisdictions worldwide automatically exchange tax-related data. The law requires that the corresponding tax data for the previous year be submitted till September of the current year. Such data include account numbers, full holder names, bank account turnovers and balances for tax administrations and agencies to be able to verify them against the data in the taxpayer’s tax returns.

This is when FATCA doesn’t work and you don’t need to report to the IRS

The FATCA reporting requirements aren’t applicable to all offshore banks. Certain jurisdictions made agreements with the US government to release their financial institutions from the above requirements. Moreover, here are 2 reasons why some offshore banks may decide against reporting to the IRS or analogous tax authorities:

  • laws of their jurisdiction do not require them to do so
  • they believe that penalty risks are not worth making efforts to comply with the reporting requirements.

Nevertheless, US taxpayers with offshore bank accounts including US citizens and Green Card holders should realize what reporting requirements their bank has and comply with the applicable tax laws. At the IRS, they have several programs to stimulate taxpayers to report their offshore accounts, with the Offshore Voluntary Disclosure Program and the Simplified Reporting Procedure among them.  With the said programs in place, penalties are lower and law compliance is easier for those taxpayers who voluntarily report their offshore accounts to tax authorities.

The IRS is authorized to impose fines and penalties on taxpayers who fail to report their offshore accounts, regardless of whether the bank submits the corresponding info thereon to the IRS. Below, possible penalties are listed:

  • pecuniary sanctions
  • tax remissions
  • criminal prosecution with a potential 10-year prison sentence is a possibility as well.

In some cases, failure to submit tax returns for offshore bank accounts resulted in fines several times the amount on the offshore bank account in question.

FYI: US citizens remain US tax residents. As such, they shall report to the IRS and pay taxes regardless of where they reside and where their income originates from. The only way to legally avoid the above duty is to renounce your US citizenship.

When isn’t the Common Reporting Standard (CRS) effective?

US citizens shall report to the IRS and report their offshore accounts on a yearly basis, while for citizens of other states it is different. They only report to the IRS if they happen to earn income in the US, and even then, not in all cases. Yet, they are undoubtedly obliged to report the earned income to their national tax authorities in the jurisdiction they permanently reside in.

Tax residents of almost all developed nations and emerging countries shall report their offshore accounts and oftentimes pay taxes on them. Hiding your offshore accounts may be treated as tax evasion, which is punished by a fine or other penalties. Depending on your residency jurisdiction laws, the requirements may vary. The CRS is extremely helpful to find and penalize those trying to dodge taxes.

A number of states refused to join automatic information exchange under the CRS. Not all of them boast reliable offshore banks. In certain jurisdictions though, the service quality is indeed high and they still haven’t introduced automatic data exchange as far as tax info is concerned (at least, for now).

Below, the states are listed that haven’t yet joined the CRS:

The list does not include Georgia, as the country is about to join the Tax Information Exchange Agreement in 2024. 

You might be surprised to see the US on the list. The thing is, the country that authored FATCA, was the first to introduce it, and made banks on a global scale report to the IRS, refuses to share tax info about foreign citizens. In spite of the efforts the IRS, the FInCEN and the other tax regulators make trying to tackle tax evasion, the US remains a major offshore jurisdiction for foreigners. Offshore banks in the US offer account setup, card issue, and security market access to overseas citizens. 

Assisted by the International Wealth experts, you will seamlessly open a bank account in the US. Remote account opening is also possible. Those about to book a free initial consultation with us should message International Wealth at [email protected]

NB: the above list may be temporary as certain jurisdictions that lured costumes by having no automatic tax info exchange before, already joined the CRS.

Tax information exchange persists: are offshore bank accounts worth opening?

It is wise to assume that offshore banks will share your data with the tax office in your residence jurisdiction, be it the IRS or any other tax authority. It is no major scare, unless you are involved in any criminal activities. Quite the opposite, it may stimulate you to set up offshore bank accounts overseas. 

Things to consider when selecting an offshore bank therefor are listed below:

  • bank service quality
  • fees and commissions
  • availability of double tax and/or agreements
  • other factors.

It pays to consider getting citizenship by investment abroad or becoming a tax resident in a jurisdiction with zero income and/or profit tax. In business terms, you should structure your offshore companies so that to optimize their taxation, maximize profits, and secure an opportunity for them to set up offshore bank accounts as well as accounts with overseas banks. 

With the IRS monitoring all deals and transactions while processing huge information volumes, US citizens have it the hardest. Everybody else won’t have to go through that many obstacles provided they employ expert assistance and act reasonably.As a reasonable first step, you are welcome to book a free initial consultation as to offshore bank selection and use offshore account benefits to the utmost in spite of tax information exchange between jurisdictions.

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