U.S. Expats Reporting Obligations For Holding a Foreign Bank Account
According to Investopedia.com, the Internal Revenue Service (IRS) does not treat money held in a foreign account the same as money that is held on a domestic account. Out of fear of being unable to take revenue from foreign accounts, the IRS has taken steps to discourage foreign account use. This is a huge area of serious concern for any U.S. individuals with assets in foreign institutions.
One example of such tactics occurred in 2014 when the IRS mandated all U.S. taxpayers holding offshore accounts in excess of $10,000 to file a new Financial Crimes Enforcement Network (FinCEN) Form 114 by June 30 or else be subject to a penalty of up to 50% of their assets.
Due to this increased aggressiveness from the IRS and the Department of Justice (DOJ), most foreign banks, especially in Switzerland and the United Kingdom, do not want deposits from U.S. citizens. Very few foreign banks have the type of compliance department necessary to handle the complex U.S. regulations and heightened scrutiny. For this reason, many foreign banks do not devote too much time and energy to courting U.S. clients.
U.S. individuals interested in opening foreign bank accounts must consider these challenges and clear up credit concerns and any possible risk flags. Decreasing as many risks as possible on an individual level can help skeptical foreign banks overlook the risk of being an American subject to IRS taxation.
Double Taxation of U.S. Expatriates
The U.S. is the only developed nation that taxes global activity. In fact, the U.S. government taxes on income that is earned anywhere in the world, even if the income comes from activities that took place exclusively with foreign capital and with foreign trading partners.
For example, a U.S. individual living and working in Germany would have to pay income taxes to the German government and the U.S. federal government. In addition, the IRS can grant itself access to foreign accounts that U.S. individuals deposit their earnings into for the purpose of collecting taxes. Also, the relief provisions, which include a partial credit for foreign taxes paid on overseas income, are often insufficient.
Foreign account holders that do not engage in economic activity in foreign markets do not have to worry about double taxation, but concerned workers and investors need to file returns with the IRS.
FinCEN Form 114
The IRS and Treasury Department have established very rigid processes for declaring overseas assets for taxation purposes. U.S. individuals are required to report any foreign bank accounts totaling more than $10,000 in aggregate, or at any time during the calendar year, to the Treasury Department. U.S. individuals are also required to report and pay tax on any income from these foreign accounts, except for “signature authority accounts”.
From the 1970s until June 2013, U.S. individuals reported their foreign assets by filing a Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR. These forms were due annually and were processed in the Treasury office in Detroit.
From June 2013 to the present, the Treasury no longer accepted the paper-based FBAR. The paper-based form was replaced with an electronic FinCEN Form 114, that is also called FBAR. The electronic FinCEN Form 114 needed to pass through the Treasury’s Bank Secrecy Act E-Filing system and included more information. This new FBAR was a separate document required to be submitted individually and did not replace income tax-filing.
The Foreign Account Tax Compliance Act
In 2010, Congress passed the Foreign Account Tax Compliance Act (FACTA) without much recognition. This was due to the fact that it did not take effect until 2014. FACTA was the first attempt for any single national government to force compliance standards on banks across the world.
FACTA requires any foreign bank to report accounts held by U.S. individuals worth over $50,000. For U.S. Expats is $200K and double when married. If the foreign banks do not report, they are subject to 30% withholding penalties and possible exclusion from U.S. markets. More than 100,000 foreign entities had agreed to share financial information with the IRS by mid-2015. The only major global economy to resist the Feds was Canada. However, this resistance came from private Canadian citizens filing suit against FACTA due to International Government Agreement clauses making it illegal to disclose private bank account information.
The information reported to the IRS through FACTA includes account numbers, names, addresses, balances and identification numbers of account holders. In addition to FBAR, U.S. individuals must also submit Form 8938 to the IRS. U.S. individuals considering opening a foreign bank account must be familiar with these requirements and possible tax penalties. Foreign retirement accounts, which have their own unique treatment, should be especially scrutinized before opening.
Potential Issues With Undisclosed Offshore Bank Accounts
Millions of U.S. individuals have offshore bank accounts for many different reasons. Estimates from the U.S. State Department show that 8.7 million Americans lived abroad in 2015 and many more had foreign accounts. However, less than 1 million taxpayers declared their assets through filing FBARs.
These estimates show that many U.S. taxpayers holding foreign accounts are not disclosing assets. In 2009, IRS stepped up their emphasis on compliance, and Americans are more likely than ever to be penalized significantly for noncompliance. These penalties include fines up to $500,000 and a prison sentence of up to 10 years for failure to file FBARs.
Even more serious than non-disclosure is a failure to pay taxes on income earned and deposited into a foreign bank account. The federal government can bring civil and criminal charges against those who do not pay Uncle Sam, even by accident. Keep in mind that all foreign accounts need to be reported to the IRS, even if the accounts do not generate any taxable income.
Although non-disclosure is can incur serious penalties, failure to pay taxes on income earned and held in a foreign bank account is even more serious. Civil and criminal charges can be brought against any who evade taxation, even if by accident. Remember that all foreign accounts, even if they do not generate taxable income, need to be reported to the IRS.
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