Are Offshore Tax Havens Legal?
Holding funds in a bank account in an offshore tax haven is generally legal. It’s, however, illegal to use this strategy to evade U.S. taxation. U.S. tax laws require American taxpayers to meet their tax obligations regardless of the source of their income. The Internal Revenue Service (IRS) requires banking institutions to report balances and banking activities of U.S. taxpayers. Currently, the U.S. has agreements with over 100 countries that require them to report American citizens’ banking activities and balances.
Foreign Bank and Financial Accounts (FBAR) Regulations
U.S. taxpayers are required to adhere to all tax regulations, including filing an FBAR annually. The taxpayer must file an FBAR if he or she has over $10,000 in an offshore account.
Why Do People Use Offshore Tax Havens and Accounts?
People use offshore tax havens and accounts for a wide array of reasons. These reasons can be either legitimate or illegitimate. In some instances, for instance, an individual may want to legally keep money in a country that has a lower tax rate than the U.S. In other instances, an individual may hold money in an offshore account to hide it from the IRS for tax evasion purposes. or to hide money that was obtained illegally, especially through corruption or other fraudulent methods. Some tax haven countries fail to honor the tax disclosure agreement and may play a part in hiding these accounts. Failing to report offshore accounts is illegal.
What are the Consequences of Using Tax Havens for Tax Evasion?
Some breaches of tax laws using tax havens for tax evasion can result in serious criminal and civil repercussions against the responsible person. Other breaches can lead to the IRS getting hold of up to 50% of the offshore bank account balance for each year the taxpayer failed to disclose the foreign account. In Las Vegas, a tax attorney can guide a person planning to set up an offshore account on how to do it correctly and legally.
When Are Tax Havens Legal?
Residing in the country where the offshore account exists and properly disclosing all taxable income that gets into the account is a perfect example of the legal use of a tax haven. Owning a property or running a business in a tax haven country and reporting any income generated from these projects to the IRS is another example of the legitimate and legal use of a tax haven.