Despite the scandals, stigmas and stereotypes, off-shore bank accounts continue to exist, offering financial benefits to the rich and richer—or that’s the assumption. With new regulations in place, the realm of legitimate off-shore bank accounts is changing to smoke out the tax evaders and force compliance.
“They’re perfectly legal, but they’re often used for illegal purposes,” says William Johnson, associate professor of law at Saint Louis University. “There’s been an obligation to pay tax on global income. This is not a recent development. But we’ve seen these off-shore accounts used to avoid U.S. taxation. Historically, we’ve had the honor system, and the honor system didn’t work very well.”
With some account holders cheating the IRS, the U.S. government stepped in to enforce the rules everyone should have already been following. “The big thing with off-shore bank accounts is FACTA, and that’s been dominating everyone’s attention,” says Adam Rosenzweig, law professor at Washington University, of the Foreign Account Tax Compliance Act. “Any—of what they define as a—foreign financial institution that has U.S. depositors is required to [report] certain things. If they do that, then that’s the end of it. But if they don’t, they impose a huge withholding tax on all payments to the account. That was a major change in the law—a huge, unilateral attempt by the United States to force foreign banks to report to the U.S. for the purposes of U.S. tax compliance. That had never been done before.”
According to the Treasury Department, FATCA, enacted in 2010, targets "non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.”
The reasons for an off-shore account vary from legitimate personal or business decisions to illegitimate “tax havens,” explains Johnson. A business venturing into a foreign market may want to open a foreign account, or a person who travels for work regularly may prefer an off-shore account for paying foreign bills. While the reasons are possibly endless—and truly irrelevant, as no reason must be given to the government, according to Johnson—it is important to note that, despite easy assumptions, there are understandable, financially intelligent reasons for storing money in a foreign country that are not related to cheating. That being said, it still is clearly motivation for some, hence the need for these new government regulations. “Some people choose to just hide the money—clearly tax evasion,” Rosenzweig says. “The only question is, how do you find it?”
Those with finances to find are not necessarily the richest of the rich. Rosenzweig explains that often the top tier of wealthy Americans enlist the support of quality professionals to avoid these financial scandals, while those in the financial level beneath them may “have enough money to want to shelter it, but not enough to hire the best advisers.” On a similar note, Johnson explains the “threshold for reporting is $10,000,” meaning the government must be made aware even of accounts that would not be considered abnormally large.
“This year, the IRS came out with regulations implementing this, and there are hundreds and hundreds of pages of regulations that people are still just trying to work their way through,” Rosenzweig says. “The IRS is permitted to enter into something called Intergovernmental Agreements (IGAs), and those could change the rules country by country. Who knows what the rules are going to be in every different country?”
Rosenzweig notes that it could be difficult to create an off-shore account presently due to fear from foreign financial institution toward government reaction, but with the right compliance it still is a legal action.
It could be argued that those dissuaded from off-shore accounts post-FACTA had questionable intentions to begin with; while new regulations and paperwork are agreeably displeasing, the system in place is there to make sure all finances are accounted for come Tax Day.