Consequences of an Offshore Bank Account

There are persistent myths and misinformation surrounding offshore bank accounts. Many Americans falsely assume income earned abroad or funds held offshore are exempt from taxation. According to the IRS, U.S. citizens must report all income from within and outside of the country. Before opening an offshore bank account it is prudent to understand the possible consequences they entail.

Account Protection

As of 2010, the Federal Deposit Insurance Corporation (FDIC) insured accounts up to $250,000 held at qualified American banks. Account coverage under the FDIC program does not convey to offshore bank accounts held by U.S. citizens. Loss of FDIC coverage is a primary consequence of using an offshore bank account, and Americans have lost billions of dollars through offshore banking frauds such as the Stanford Financial Group fiasco of 2009.

According to the IRS, U.S. citizens who are signatories on offshore bank accounts with a value over $10,000 must file IRS Form TD F 90-22.1. The requirement to file this form increases the expense associated with filing your annual tax returns. Although the IRS guards its formula determining who gets audited, logic dictates that owning an offshore bank account can only serve to increase your odds of becoming an audit target.

Some offshore bank accounts are held in foreign currencies. A consequence of keeping your funds in a currency other than the U.S. Dollar is that you become exposed to potential currency exchange rate fluctuation and devaluation. If the value of the foreign currency held by your offshore bank account declines against the U.S. Dollar, then you consequently suffer a loss in value within your offshore account. Offshore bank accounts which are U.S. Dollar denominated do not entail this exposure.