Do Offshore Bank Accounts Protect You from Creditors?

Do Offshore Bank Accounts Protect You from Creditors?

Offshore Bank Accounts Protect You from Creditors?

When a US person wants to protect their assets from judgments, creditors, and possibly the IRS, oftentimes they will consider relocating the assets to a foreign country to protect them and/or opening a foreign bank account and placing the money into the foreign accounts. The problem with this strategy becomes the fact that US persons are required to disclose their foreign accounts, assets, and investments on various international information reporting forms such as the FBAR and Form 8938.  While technically just having foreign accounts does not protect the money in those accounts, they can provide some ancillary benefits for the simple fact that it is harder for a creditor to reach the assets overseas. Let’s take a brief look at what happens when you move accounts outside of the United States.

IRS Reporting for US Persons (FBAR)

The first thing to keep in mind is that US persons who own foreign accounts are required to disclose this information each year annually to the US government on the FBAR Form (aka FinCEN Form 114). This is a requirement of all US Persons who meet the threshold for reporting and so even if the particular foreign financial institution is not going to disclose the information to the government and/or the country where the account is located did not enter into a FATCA Agreement with the United States — from a technical standpoint, the taxpayer still required to report the account and so if a reason for opening the account is to minimize transparency, then it may not serve the intended purpose.

FATCA Agreement vs Form 8938 Reporting

Another important aspect of FATCA (Foreign Account Tax Compliance Act), is that there are two components to it. From an institutional standpoint, more than 110 countries and over 300,000 Foreign Financial Institutions have agreed to report US account holders to the US government. This is a requirement of the Foreign Financial Institution. On the other hand, the individual taxpayer is required to report the account or asset as well on Form 8938 which was developed in conjunction with FATCA. So again, like the FBAR requirements, a US person is still required to report the account that is located overseas as a requirement of taxpayers with foreign accounts — whether or not the foreign institution is also reporting to the US government.

Creditor Will Have a Harder Time Getting to the Assets

One benefit of opening foreign accounts is just the simple fact that it is harder for creditors to go overseas to try to levy or otherwise obtain money in assets and accounts. In general, most foreign countries are not that cooperative in forking over money that is contained within their borders in conjunction with a US lawsuit. Likewise, if the taxpayer placed the asset into an irrevocable foreign trust for example in an offshore asset protection country, it may be very difficult in order for the US creditor to go after it based on all the hurdles set up in countries such as Nevis and the Cook Islands.

But a Judgment Can be had against US Assets

One important caveat though is that even if it is harder to go after the foreign account or asset, creditors do not have to go after just that specific asset. Rather, if the person also has assets in the United States, it may be just as easy for them to go after the US asset by seeking a levy or other seizure remedy — depending on the specific state in which the asset is located.  Also, Taxpayers have to be careful of committing a fraudulent conveyance as well. Likewise, if it is Internal Revenue Service coming after the taxpayer, they may be able to issue a Notice of Federal Tax Lien, Levy, Seizure, and/or even deny or revoke a passport.

Should You Move Your Accounts Offshore?

Before a Taxpayer decides to move assets offshore they should carefully consider whether or not doing so will achieve the intended purpose. Not all foreign countries provide FDIC-insured equivalent and if you place your assets into certain foreign countries and/or foreign trusts it may be difficult to retrieve the account or assets from the foreign country at a later date.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.