by Brian Mahany
Immediately after posting a story about Cyprus’ ill fated plan to tax bank accounts, the Wall Street journal ran a story about Russians “rethinking” offshore accounts in there. We are not surprised. People invest and open foreign bank accounts because they want to keep their hard earned money safe, not see it taken by a foreign government. While no one would be surprised if this happened in North Korea or some third world tin pot dictatorship, Cyprus was popular offshore financial haven.
Popular until this week.
Although the government killed the plan to levy a “one time” levy on bank accounts, the damage has been done. Actually, its even worse than we imagined. According to the WSJ article, accounts are frozen meaning people can’t access their own money.
Cyprus has long enjoyed an international reputation as an international banking hub. Although not very popular with Americans, many Europeans and Russians bank there. We know several Russian – Americans that do as well.
Where you open a foreign bank account matters as much as making sure that you properly report the account.
U.S. taxpayers are required to report foreign financial holdings, including bank accounts, on a Report of Foreign Bank and Financial Accounts or “FBAR” form. The FBAR, also known by its form number TD F 90-22.1, must be filed annually. Failure to file an FBAR may be a felony and always carries the risk of high penalties. The penalties can be as high as $100,000 per account for each year unreported or 50% of the highest account balance.
Many Americans think the biggest risk they face is paying high fines to the IRS. There is an amnesty program and other voluntary disclosure and opt out options to help with the penalties. Remember, however, that losing your money to foreign taxation or having the account frozen is also a risk. Just look at Cyprus.
The country’s banking reputation has been so badly tarnished by the proposed tax that accounts have now been frozen to prevent runs on the bank. This means customers can’t get their money. Having money in the bank isn’t very useful if you can’t withdraw it or spend it when you need it.
The take home from all this is to be careful where you invest. While it makes sense for many people to have offshore accounts, there is a risk that having them in the wrong place may mean your account is frozen or taxed. Virtually no nation levies a tax on bank accounts but when politicians get desperate, watch out.
The money you earn to put in the account is taxable but no one taxes it a second time once deposited. If you have money in Greece, Spain, Italy, Ireland and other fiscally unsound nations or if you have money in a politically unstable place such as North Korea, Egypt, Iran, consider moving it while you can. It doesn’t matter how stable the bank is… money should only be invested where both the bank and country are considered stable.
Before you move money, give us a call if your foreign accounts are currently unreported. With the IRS looking back 8 years, simply moving your money won’t protect you from the IRS risk. Beginning next year, foreign banks will be required to report account holders with ties to the United States. Many banks are cooperating already. Once reported, there is no chance to get into the IRS’ Offshore Voluntary Disclosure amnesty program.
Holders of unreported accounts can call for a no cost, no obligation assessment of their options. Most of our foreign reporting work is offered on a flat fee basis and we will defend you for free if the IRS disagrees with our position.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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