Few tax sagas reach the drama and intrigue that the Panama Papers have. The case is considered the granddaddy of offshore account data leaks and holds lessons for the uber-wealthy, yes, but also for the rest of us.
The Panama Papers scandal erupted in April 2016, unveiling a colossal leak of 11.5 million documents from the Panamanian law firm Mossack Fonseca. This unprecedented (at the time) leak exposed the secret financial dealings of the world’s elite, accused of utilizing offshore tax havens to conceal their wealth and evade taxes. The Pandora Papers later eclipsed the scope by a few million documents from 13 additional sources. The revelations triggered global outrage, led to high-profile resignations, and sparked numerous investigations into financial corruption and tax evasion.
The trial began and abruptly ended weeks ago, with a court ruling expected momentarily. Meanwhile, Mossack Fonseca co-founder Ramon Fonseca passed away while awaiting sentencing after a lengthy hospitalization. Aside from the high drama value, what should most taxpayers take away from this story about offshore (or foreign) accounts? Let’s dive in, using questions tax professionals are often asked:
Are offshore accounts legal?
Generally speaking, yes. The IRS states that taxpayers “maintain overseas financial accounts for a variety of legitimate reasons, including convenience and access.” They allow for easier international spending and investing (including in real estate) and money transfers for those who live or work abroad. You may also have money in foreign accounts connected to your retirement funds.
How common are they?
Many U.S. taxpayers have no use for offshore accounts besides the abovementioned purposes. The stereotypical purpose of “tax sheltering” has limited effects because U.S. taxes are lower than in many countries. For that reason, the U.S. is considered a major international tax haven itself.
So, can offshore accounts be used legitimately to shelter money?
If by “sheltering” you mean asset protection, then yes, there are legitimate reasons to consider offshore accounts. Asset protection from inconsistent state-by-state differences in trust laws is one. Privacy can be another benefit, although data leaks complicate that matter.
When do offshore accounts cause problems?
Tax evasion and money laundering are two activities certain to earn your offshore account attention from either the IRS or the Financial Crimes Enforcement Network (FinCEN). Failing to file the correct form or report assets accurately can flag you for further inspection. This could involve two separate forms: the IRS Form 8938 (Statement of Specific Foreign Financial Assets) and FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). As the IRS states, individuals and domestic entities must check each form’s requirements and relevant reporting thresholds and determine if they should file Form 8938, Form 114, or both. You have even more forms to file if you have a retirement account abroad, such as a foreign trust or annuity from a current or previous employer.
How else does the government track foreign account activity?
Most major global economies are subject to the U.S. Foreign Account Tax Compliance Act (FATCA), which requires foreign banks to report accounts held by U.S. citizens worth over $50,000. The Bank Secrecy Act also enables FinCEN to require financial institutions to keep records of and report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
The Panama Papers scandal is a stark reminder that correctly reporting offshore assets and accounts to tax authorities is critical. While having an offshore account is not inherently against tax laws, failing to disclose and report it accurately can lead to severe penalties (or worse). Feel free to contact us with questions.
