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Important Tax Considerations if You Have a Foreign Bank Account

Written by prositesfinancialAug 10 • 3 minute read

As a U.S. resident, owning a foreign bank account isn’t something you should take lightly. The IRS requires you to report your foreign bank account if your account balances exceed certain limits. As with any financial compliance issue, always make sure you consult with a skilled financial advisor or accountant regarding your foreign bank account and related tax matters. Below are some key tax considerations to make regarding credit concerns, tax requirements, or other risk factors.

FinCEN Form 114

Foreign bank accounts are taxable, so the IRS and the U.S. Treasury have a strict process for declaring any assets that may be held in these accounts. If you are an American citizen with foreign bank accounts totaling more than $10,000 per calendar year, you must report these accounts to the Treasury Department. You must also report and pay tax on any income from these accounts.

Foreign account holders were previously required to file Treasury Form T.D. F 90-22.1, a Report of Foreign Bank and Financial Accounts. This is commonly known as an FBAR. After June 2013, the Treasury Department decided that paper-based FBARs were no longer acceptable. All taxpayers holding offshore accounts worth more than $10,000 need to electronically file a new form, the Financial Crimes Enforcement Network (FinCEN) Form 114 (FBAR).

Double Taxation of U.S. Expatriates

American citizens are taxed everywhere they earn income, even if their transactions took place entirely on foreign soil, with foreign capital, or with foreign trading partners. For example, Americans who live in Germany must pay taxes to the U.S. federal government as well as the German government. If an American worker deposits their monthly income in a German bank, the IRS can access that account to collect taxes.

Even workers and foreign investors need to file with the Internal Revenue Service (IRS) every year. Some tax relief provisions include a credit for paying taxes that were owed on income earned overseas, but these are very few. You will likely need support from a tax professional to determine which credits, if any, you may qualify for.

Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) was passed quietly by Congress in 2010, but the law was so complex that many Americans did not even realize that the IRS had enacted it. Its implementation took place over a period of four years. FATCA requires foreign banks to report all accounts in which American citizens own more than $50,000; otherwise, the bank may be subject to a 30% withholding penalty and possibly be banned from the U.S. market.

More than 100,000 foreign companies and most foreign governments agreed to share with the IRS financial information. Canada is the only major nation that has not complied with the new IRS protocol. Thanks to FATCA, the IRS can obtain account numbers, names, balances, addresses, and identification numbers from foreign banks that provide banking services to the owners of those accounts.

Americans who hold accounts with foreign banks must also complete Form 8938 and submit it to the IRS, alongside the FBAR form. Anyone who wants to open a foreign bank account should be aware of these stringent requirements and possible tax penalties, especially for foreign retirement accounts, which have their unique treatment. Moreover, all foreign bank accounts that have been opened by Americans must be reported to the Internal Revenue Service (IRS), even if they do not generate taxable income.

Penalties for Tax Evasion With Foreign Bank Accounts 

Unfortunately, a good number of foreign bank account holders are not reporting their earnings or investments. The IRS has increased its efforts to enforce compliance since 2009, and Americans are now more likely to be slapped with stiff penalties for failing to file an annual return (FBAR) when they have assets overseas. Individuals can be punished with up to $500,000 and a possible 10-year prison sentence for not filing an FBAR.

Failure to pay taxes on income earned abroad and deposited into a foreign bank account is even worse than not reporting assets. Federal authorities can bring criminal charges against those who fail to pay, even if the failure was accidental.

Always Maintain Tax Compliance

If you have a foreign bank account, it’s always best to speak with a professional tax accountant to help you to comply with tax reporting requirements. Experts can help you understand what forms you need to file, and you may have to file more than one form to avoid the penalties for noncompliance. For your own security and prosperity, make sure that your bank has the information it needs to file either IRS Form 8938 or FinCEN Form 114. The penalties for non-filing either form if you are required to do it are very severe, but they can be avoided with diligent tax planning.

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