There are a number of reasons you might consider opening a foreign bank account. Common ones include ease of access to foreign currencies, plans to travel or live overseas, international investment opportunities, a need to protect assets or geographic diversification of an investment portfolio. If you are considering opening a foreign bank account, it is important to think through the tax implications.
Key watchouts for foreign accounts
The Internal Revenue Service generally disfavors money held in foreign banks, and many foreign banks are not equipped to manage compliance with U.S. regulations. There are several key things to understand prior to opening a foreign bank account:
- The U.S. government taxes citizens on income earned on foreign activity, which means that taxes must be paid on money deposited into a foreign account. While there are some provisions that provide partial relief, this still presents an increased tax burden. There are also special treatments for retirement accounts abroad.
- There are stringent requirements for declaring foreign assets. If you have foreign accounts that cumulatively total more than $10,000 in a calendar year, these accounts must be reported to the Treasury Department. This reporting is done through an electronic form called the Financial Crimes Enforcement Network (FinCEN) Form 114. This form is in addition to – not in replacement of – an income tax filing.
- The Foreign Account Tax Compliance Act (FACTA) requires non-U.S. banks to report accounts held by U.S. citizens that are worth over $50,000. If the bank fails to report, it is subject to 30% withholding penalties and the potential of exclusion from U.S. markets. This reporting by the foreign bank will provide the IRS with account numbers, balances, addresses, names and identification numbers of account holders.
Potential IRS enforcement actions
Many foreign account holders still fail to report foreign assets. The IRS has taken an increased interest in ensuring compliance, and the fines and penalties are meaningful. An individual who fails to disclose a foreign account through the FinCEN form can be penalized up to $500,000 and up to 10 years in prison. Failure to pay taxes on income in foreign accounts has the potential to result in civil and criminal charges.
If you are considering opening a foreign bank account, it is important to set up your accounts to your benefit while staying in compliance with the tax requirements. If you have a foreign account and are concerned about your tax compliance, consider reviewing your past payments and determine if you face any risk.