Offshore Accounts

Offshore accounts are legal, but the income they generate is taxable in the United States no matter where the account is held. This page covers why that is, which jurisdictions are commonly used for offshore banking, what you still have to report to the IRS, and the tradeoffs between privacy, asset protection, and compliance.

Offshore accounts can offer real advantages, including greater privacy and, in some cases, stronger asset protection. They also bring more scrutiny and specific reporting obligations, and an offshore account attorney can help you meet those requirements while protecting your rights. Whiteford Tax Defense has handled IRS audits for individuals and organizations with offshore accounts.

Offshore income is still U.S. taxable income

Nearly all income earned by a U.S. individual or organization is taxable, including interest, dividends, and other income generated by offshore savings accounts, certificates of deposit, and trusts. It does not matter where the money is held or how difficult it would be for the U.S. government to reach it directly, the income itself is taxable. Some taxpayers knowingly avoid reporting this income, while others simply forget.

Switzerland has long been a popular choice for high-net-worth individuals seeking security, stability, and privacy, but its reputation does not change the tax treatment. Other jurisdictions commonly used for offshore investing include:

• Cyprus
• Panama
• Canada
• Georgia
• Armenia
• Singapore
• Cook Islands
• Cayman Islands

Where taxpayers move funds can shift quickly with world events and politics, but the U.S. tax obligation on the income itself does not change with the destination.

What you still have to report

Individuals with offshore accounts that exceeded $10,000 in total value at any point during the year must file the FBAR, FinCEN Form 114, separately from their income tax return. Form 8938, the FATCA disclosure form, is also generally required with your income tax return once your foreign assets pass the applicable threshold. For the full FBAR reporting mechanics, deadlines, and penalties, see our FBAR page.

Joint accounts require extra care. Everyone named on a joint account must report the full balance and the income it generated, converted to U.S. dollars at the December 31 exchange rate and reported by April 15, with an automatic extension to October 15. Whether a spouse must also file depends on the account's ownership and the couple's filing status, and children or their guardians must file too; there is no exemption for minors.

Some individuals and entities, including certain government entities, are exempt from FBAR reporting. Confirming that an exemption actually applies, and that no other reporting duty is triggered, is best done with an attorney rather than assumed.

Voluntary disclosure options

Taxpayers who previously underreported or failed to report offshore accounts can use the Voluntary Disclosure Program to get back into compliance. Those who did not realize they had a reporting obligation may be better served by the Streamlined Procedures, a version of the program built for unintentional noncompliance. The program also offers a path for taxpayers who deliberately and willfully hid assets and want to avoid criminal exposure.

Asset protection and disputes

Offshore accounts can make it harder for creditors and legal authorities to reach assets in a dispute, which is part of why they remain attractive for asset protection. But protection and compliance are not the same thing, and an IRS discovery of a previously unreported or underreported account can lead to significant difficulties. An attorney can negotiate with the IRS or state tax agencies to reduce penalties and put you in a stronger position going forward.

Offshore accounts are one part of a broader set of cross-border tax obligations; see our international tax overview for related topics.