An offshore account is an account with a financial institution that is based in a different county than your country of residence. Thanks to online banking, people are finding it easier to maintain foreign banking accounts. According to the U.S State Department, more than 8.7 million Americans have offshore bank accounts.
If you are opening an offshore account, you have probably thought about how it might affect your taxes. For starters, the IRS doesn’t like U.S citizens to have overseas or offshore accounts. In addition, the money held in foreign banking institutions is treated differently from that in domestic banks. Here we will take a comprehensive look at tax implications on offshore accounts.
American expatriates pay double taxes
Did you know that the U.S government levies taxes on income earned? It doesn’t matter where the money comes from, the IRS will levy taxes. An American expatriate working in Italy, for example, will have to pay both the U.S federal government and the Italian government.
However, not every offshore account holder conducts economic activity in a different country. If this is the case, you don’t have to worry about double taxation. However, you need to file your returns on offshore accounts with the IRS regardless.
FinCEN form 114
Declaring offshore assets can be rather tiring due to the rigid processes put in place. If your foreign account balance totals more than $10,000 at any given time over the course of the year, you must file a report with the Treasury Department. As the foreign account holder, you will need to pay taxes on any income in these accounts, except for “signature authority accounts.”
The form you will be required to fill out is FinCEN Form 114. It is a rather detailed document that is submitted individually to the Treasury Department. Failure to file this form will result in a penalty of up to 50% of your assets.
Foreign account tax compliance act
The Foreign Account Tax Compliance Act requires all foreign banking institutions to report to the IRS with all information about bank accounts held by U.S taxpayers. If these institutions fail to comply, they are cut off from accessing vital U.S financial markets.
It is easier to get caught when you hold an offshore account because more than 100 nations back up this law. More and more financial institutions are sharing client information with the IRS. Reporting your income ensures you avoid paying numerous penalties.
You need to file taxes to reduce the chances of criminal prosecution and mitigate penalties. Contrary to what most people think, having offshore accounts does not exempt you from paying taxes.