While there are legitimate reasons for maintaining offshore banking accounts, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

• FBAR – Report of Foreign Bank Account – $65 for up to 10 Accounts
• FATCA – Foreign Account Tax Compliance – $75 for up to 5 Accounts

US citizens regardless where they live are taxed on their worldwide income. They are obligated by law to report any income generated from any offshore banking activities. The most common type of income that may be generated by offshore banking accounts are interest, dividends and capital gains. In addition to reporting the income, any person who has foreign accounts may be required to report these accounts to the IRS if their balances go over certain thresholds.

Over the years, the IRS has become more active in enforcing the laws that deal with foreign investments. They have embarked on a new mission with the objective of bringing taxpayers who have used undisclosed offshore banking accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. To achieve this goal, the IRS has threatened with exorbitant civil penalties and criminal prosecution.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine ofup to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Under the renew IRS efforts, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore bank accounts such as brokerage accounts, nominee entities, foreign trusts, employee-leasing schemes, private annuities or insurance plans just to name a few.

Since 2009, the IRS has collected $5.5 billion from people who have participated in offshore voluntary disclosure programs. The IRS has indicated that 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. Banks such as UBS, HSBC and Credit Suisse have started to cooperate with the IRS by providing listings of US citizens with bank accounts in foreign countries.

The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistle blowers, and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting become effective.

The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases, and they continue working on a wide range of international tax issues and follows ongoing efforts with DOJ to pursue criminal prosecution of international tax evasion.

The objective remains the same as the 2009 OVDP – to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.