Have Foreign Bank Accounts? Know the Rules and Tax Implications or Else

It’s common, and perfectly legal, for Americans to have bank accounts in foreign countries. Many Americans are or were citizens of foreign countries and visit those countries often, while others live abroad full-time. They might have a family, own property and pay bills in another country. Some people just travel frequently to certain destinations and find it easier to have money in a foreign bank account.

Of course, Americans also open foreign bank accounts to hide money, whether they’re trying to shield it from the IRS, a soon-to-be ex-spouse, or a business partner. This is a crime and a costly one.

American taxpayers have always been required to report income earned anywhere in the world, regardless of the amount. For example, even an American expatriate who lives and works exclusively in a foreign country must pay taxes to both the foreign country and the U.S.

However, the Foreign Account Tax Compliance Act (FATCA) of 2010, which went into full effect in 2014, was passed to ramp up the fight against tax evasion. In addition to paying tax on income, FACTA requires Americans with foreign accounts to report those holdings.

Let’s discuss the specific requirements, penalties for noncompliance, and how to become compliant if you’ve made mistakes in the past.

Report of Foreign Bank and Financial Accounts (FBAR)

If you have assets in one or more foreign financial accounts (bank accounts, brokerage accounts, mutual funds, trusts, etc.) that total more than $10,000, you must file an FBAR by submitting a Financial Crimes Enforcement Network Filing (FinCEN) 114 form electronically by April 15. FinCEN replaced the paper-based Treasury Form TD F 90-22.1 form in June of 2013.

The FinCEN filing is separate from your federal income tax return. The maximum extension for this filing is six months.

If you have foreign accounts worth more than $50,000, FATCA requires you to file Form 8938 with your income tax return. Non-U.S. banks must also report accounts held by Americans that exceed this total. FATCA makes it possible for the IRS to receive account numbers, balances, names, addresses and other account holder information.

More than 100,000 foreign entities have agreed to comply with FATCA. However, because of the complexity of these requirements and a major crackdown by the IRS and Department of Justice in recent years, some foreign banks are forcing Americans to close their accounts rather than deal with a compliance headache.

Penalties for Noncompliance

Failure to file an FBAR could result in a penalty of up to 50 percent of your assets, a fine of up to $500,000, and up to 10 years in prison. If you don’t report foreign income, you could face civil and criminal charges.

In addition to punishing individuals, if non-U.S. banks fail to report accounts held by American citizens that are worth more than $50,000, these banks will be subject to 30 percent withholding penalties. They could also be banned from U.S. markets.

How to Get Compliant

Taxpayers who didn’t report foreign holdings can square up with the U.S. government by participating in the Offshore Voluntary Disclosure Program. These taxpayers can amend income tax returns and file the appropriate FBAR forms for up to eight previous years, but they’ll also have to pay a 27.5 percent penalty on the highest unreported balance in foreign accounts.

For those cases in which the failure to report was accidental, there’s a streamlined process that allows the taxpayer to get off the hook by paying 5 percent of the total of all end-of-year foreign account balances.

The Bottom Line

Keeping money in foreign accounts is not illegal. Hiding money and failing to notify the U.S. government of foreign accounts and income is a serious crime.

Before you open a foreign bank account or other financial accounts, speak with your accountant so you understand your tax obligations. Make sure you know the reporting and filing rules, as well as the penalties. Put as much money as you want in foreign accounts – as long as you follow the rules.

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