Are Foreign Accounts Worth It?

Clients often ask whether they should utilize offshore accounts for tax planning and asset protection. For asset protection, offshore accounts may work if both the taxpayer and the assets are offshore. However, U.S. Courts have held U.S. taxpayers in contempt of court, and put them in jail, if the taxpayer asserts in front of the judge that he cannot obtain the assets because they are in a foreign account. Thus, offshore accounts for asset protection in most situations is not a viable option.

Regarding tax matters, U.S. residents or citizens are taxed on all income and assets regardless of where the assets are held. Many individuals erroneously think by titling assets overseas they are avoiding income or estate tax. Often what these U.S. citizens were falsely relying on was merely the secrecy laws of foreign countries.

As you may have read in newspapers and the popular press, many countries are loosening their secrecy laws in the face of increased U.S. pressure. UBS and other banks are now cooperating with the IRS. The IRS has targeted offshore accounts as a major enforcement issue. The IRS has hired thousands of new agents and imposed greater reporting requirements.

Among these reporting requirements is a return taxpayers must file by June 30th for the 2008 year. (Report of Foreign Bank and Financial Accounts or "FBAR.") There are a number of other returns associated with foreign accounts. You may have also read about a voluntary disclosure program announced by the IRS for taxpayers who confess their wrongdoing. However, this voluntary disclosure program does not eliminate the requirement to pay taxes, interest and all penalties. What it does do is avoid criminal sanctions and may reduce penalties.

In sum, foreign accounts may present opportunities and advantages for certain U.S. taxpayers. However, considering the reporting requirements, the suspicion of fraudulent conveyance, and the cost involved, most clients should conduct their asset protection and tax planning within the U.S.