Can a United States Citizen Have an Offshore Bank Account?

One of the downsides of the Internet is the dissemination of misinformation. That has led some to believe that US citizens cannot open and maintain offshore bank accounts, investment accounts, and other types of financial resources. That’s not the case.

While some things have changed over the years, the truth is that US citizens are free to open accounts outside the country’s borders. Here is some necessary information about this type of financial strategy and what it could mean for you.

What Qualifies as an Offshore Bank Account?

An offshore bank account is any financial account based in a country outside where you hold citizenship. In the case of a US citizen, this means establishing and maintaining a checking, time deposit, savings, investment, or any other type of financial account with a bank that is based and operates outside the jurisdiction of the United States.

Offshore bank accounts are sometimes considered the province of the wealthy alone. The truth is that offshore banks often welcome clients who would more readily identify as middle class in terms of economic status. That’s made them increasingly attractive to people who are seeking to build financial reserves for the future.

Reasons Why You Would Want an Offshore Account

Why open an offshore bank account when you can have your choice of domestic ones? There are reasons why opting to augment your domestic accounts with offshore ones makes a lot of sense.

For example, the higher rates of interest may apply to checking, savings, and time deposit accounts based in another nation. When the plan is to allow the money to remain in those accounts and watch the balances grow over time, you could enjoy a greater return on the deposited funds.

How could more interest income benefit you? Should you be thinking of retiring in a nation where the cost of living is lower, and your pension and other retirement funds would allow you to live more comfortably, it makes sense to utilize offshore accounts. You may also find it easier to purchase a home in that offshore location if you have established banking or investment accounts in place.

Understanding the Role of FATCA and How It Applies to US Citizens

Where do the rumors about US citizens not being able to have offshore accounts arise? One possible source is due to misunderstanding what is known as the Foreign Account Tax Compliance Act, better known as FATCA. When FATCA was passed as part of the HIRE Act, several financial pundits claimed that the whole point of the new Act was to prevent citizens from establishing offshore accounts. In fact, that was not the point.

For individuals, what FATCA did establish is the necessity of filing documents that verify the existence of the accounts and make a note of any interest earned in some cases. Despite what some still insist, FATCA does not automatically mean that any tax is assessed.

If you need to file with the IRS, the key to understanding is monitoring your offshore account balances. If the cumulative total of your offshore balances meets or exceeds USD $10,000 at any time during the tax year, you will need to report the activity with Form 114 FBAR or Foreign Bank Account Report.

Remember that the cumulative balance doesn’t have to remain above the USD $10,000 figure for any length of time. If that should happen on a single day during the tax year, you will need to file the report. Even then, that doesn’t mean you will owe any taxes on those account balances. In many cases, anything that you might owe will be offset by the Foreign Tax Credit, assuming that you meet the qualifications for receiving the credit.

What About Offshore Investment Accounts? Do They Work the Same?

The same general principle applies to investment accounts. If they reach a specific value, then there is the need to report the activity to the IRS. This is because some investment accounts, especially those classified as foreign retirement accounts, may be considered foreign grantor accounts.

Depending on the nature of the account, it may be necessary to file IRS Form 3520. The report's proper name is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. It may also be necessary to file IRS Form 3520-A or the Annual Information Return of Foreign Trust with a US Owner.

Don’t let the addition of another form or two discourage you from opening offshore accounts. The tax forms themselves are not as daunting as the names suggest. Further, the institutions where the funds are based will be happy to help you assemble the data needed to fill out the forms accurately.

Penalties for Failing to File the Proper IRS Forms

If you are required to file any of the forms mentioned above, make sure they are completed correctly. By not filing the forms or omitting required information, you run the risk of being assessed a penalty.

Dependent on the error or omission, these penalties could be as much as 35% of the funds involved. You might also have liens placed on your domestic salary or court-ordered deductions from your domestic bank accounts.

Offshore Bank Accounts and FATCA Compliance

With the passage of FATCA, there was speculation that offshore banks would stop doing business with US citizens. A few banks decided to turn away any new US depositors while urging current depositors to find new homes for their accounts. However, offshore banks in many nations chose to adjust their reporting and client support to be in full compliance with FATCA.

What does this mean for you as someone who has offshore accounts? It means you may have another form or two to fill out when tax season rolls around. The offshore bank where your accounts reside has mechanisms in place to help you know if filing the form is necessary. You can expect the same level of support on every other front.

Should You Open an Offshore Bank Account?

US citizens continue to enjoy the benefits of opening offshore bank accounts legally. If you are searching for options to grow your financial portfolio, offshore accounts remain a great option. Consider this as one more way to build wealth and enjoy more security in the years to come.