The tax implications are a major worry for Americans who have assets in foreign institutions for whatever reason. The Internal Revenue Service (IRS) considers overseas bank accounts differently from domestic bank accounts. To put it clearly, they don’t want US people having offshore or foreign accounts—mostly because they are afraid of not being able to withdraw funds from such accounts—and hence discourage the practice.
And, to be honest, most international banks no longer welcome deposits from US citizens—not even those in traditional destinations like Switzerland and the United Kingdom. Their hesitancy stems from the IRS’s and the Department of Justice’s heightened aggressiveness (DOJ).Foreign banks can only dedicate so much time and effort to recruiting American clients, and few have the sort of compliance staff that can manage complicated US rules and increased scrutiny.
Americans who wish to create international bank accounts should keep these obstacles in mind and do all they can to clear up any credit difficulties or other red flags. Being an American citizen susceptible to IRS taxes might cause an international bank to pause, thus it is best to seem less dangerous on an individual basis.
- Any US citizen with more than $10,000 in overseas bank accounts must report them to the IRS and the US Treasury, both on income tax returns and on FinCEN Form 114.
- The Foreign Account Tax Compliance Act (FATCA) compels foreign banks to submit to the IRS account numbers, balances, account holders’ names, addresses, and identification numbers.
- Those who fail to report foreign accounts or pay taxes on foreign account assets may face civil and criminal prosecution from the federal government.
Double Taxation of U.S. Expatriates
Unlike practically every other nation, the United States taxes its people on revenue generated anywhere in the globe, even if the activity took place entirely on foreign land, with foreign money, and with foreign commercial partners. In reality, the United States is the only industrialized country that taxes worldwide activities.
This implies that an American expatriate living and working in Germany, for example, must pay income taxes to both the German and federal governments. If an American employee puts their monthly wages in a German bank, the IRS may get access to that account in order to collect taxes. There are certain relief mechanisms, such as a partial credit for foreign taxes paid on income earned abroad, but they are sometimes inadequate.
Because not all foreign account holders participate in economic activities overseas, they are not subject to double taxes. However, worried employees and investors must submit tax filings with the IRS.
FinCEN Form 114
Because foreign accounts are taxed, the IRS and Treasury Department have a highly strict procedure for disclosing abroad assets. Any American citizen who has more than $10,000 in overseas bank accounts at any point throughout the calendar year is obligated to declare such accounts to the Treasury Department. They must also disclose and pay taxes on every revenue generated by these accounts, with the exception of “signature authority accounts.”
From the 1970s through June 2013, foreign account holders submitted an FBAR using Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Forms were due yearly and were handled at the Detroit Treasury office.
The paper-based FBAR was no longer accepted by the Treasury after June 2013. Instead, all US taxpayers with overseas assets worth more than $10,000 were required to electronically complete the new Financial Crimes Enforcement Network (FinCEN) Form 114, better known as the FBAR. FinCEN 114 included additional information and was required to go through the Treasury’s Bank Secrecy Act E-Filing System. This new FBAR did not replace an income tax file, but rather was a distinct document that had to be presented separately. Taxpayers have until June 30, 2014, to submit the new form or face a penalty of up to 50% of their assets.
The Foreign Account Tax Compliance Act
Without much fanfare, Congress approved the Foreign Account Tax Compliance Act (FATCA) in 2010. One reason for the act’s relative obscurity was its four-year implementation period: FATCA did not go into force until 2014. Never before has a single national government sought, and thus far succeeded, in imposing compliance criteria on banks worldwide.
FATCA compels any non-US bank to declare accounts owned by American citizens worth more than $50,000 or face withholding penalty of 30% and potential exclusion from US markets. More than 100,000 international firms have consented to provide financial information with the IRS by mid-2015. Russia and China both consented to the FATCA. Canada is the only big global economy fighting the Feds; nevertheless, it was private persons, not the Canadian government, who filed a lawsuit to prevent FATCA under the International Governmental Agreement clause, which makes it unlawful to send up private bank account information.
The IRS obtains account numbers, balances, names, addresses, and identity numbers from account holders through FATCA. In addition to the mostly redundant FBAR form, Americans with overseas accounts must file Form 8938 with the IRS. Those considering establishing a foreign bank account should be aware of these restrictions and potential tax penalties, particularly for retirement funds held overseas, which have their own specific status.
Even if the accounts do not produce taxable income, all overseas accounts must be disclosed to the IRS.
Foreign Bank Accounts and Tax Evasion
A multi-millionaire US person with an ultra-secret bank account in Geneva is a common example of offshore tax evasion. Millions of Americans create offshore bank accounts for a variety of reasons. It’s another matter if they report them.
According to the US State Department, around 9 million Americans living abroad in 2016; the Federal Assistance Voting Program’s “2016 Overseas Citizen Population Analysis Report,” released in September 2018, placed the figure at 5.5 million. It’s realistic to assume that many millions more Americans have international accounts. Despite this, fewer than 1 million taxpayers submitted FBARs in 2016 to report their assets.
Clearly, many overseas account holders do not register their holdings. However, the IRS has stressed compliance since 2009, and Americans are more likely than ever to face hefty fines and penalties for failure to disclose. Individuals who fail to submit an FBAR may face fines of up to $500,000 and jail sentences of up to ten years.
Failure to pay taxes on money generated and placed into a foreign bank account is much more severe than non-disclosure. The federal government has the authority to file civil and criminal penalties against anyone who fail to pay Uncle Sam, even if it is by mistake.
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