Posted by KLSM CPA Firm PLLC

Operating a Foreign Bank Account: Tax Implications for Americans

Operating a Foreign Bank Account: Tax Implications for Americans

All US citizens with foreign accounts need to worry about the tax implications. Uncle Sam does not treat all funds held in a foreign bank account the same way as a domestic bank account. In other words, Uncle Sam does not like Americans operating a foreign bank account.

On the other hand, a lot of foreign banks discourage deposits from US citizens. Their reluctance can be traced to the increased aggression from the IRS and the DOJ (Department of Justice). Only a handful of foreign banks have the necessary compliance department that understands and can handle exceptional scrutiny and regulations from the US. 

Americans with a keen interest in opening an offshore account should try and get the credit concerns off the way.


US Expatriates and Double taxations 

When it comes to taxes, the US government stands out. It is the only government that levies a tax on Americans for income earned anywhere on the planet, even if the activity was exclusively restricted to foreign soil, with foreign partners and foreign capitals. 

The implication of this is that an American expatriate living and working in France will pay taxes to both the France and US federal governments. It does not matter if such American deposits his money to a bank in France as Uncle Sam can get into such an account and pull out its taxes. The good news is that there are a couple of relief provisions like partial credit targeted at foreign taxes on overseas income even though they are hardly sufficient.

Not all persons with an offshore account have a foreign economic activity, limiting the issue of double taxation. 


FinCEN Form 114 

There is a complicated process of declaring offshore assets set forth by the IRS and Treasury Department since foreign accounts can be taxed. Any US citizen with an offshore account of more than $10,000 must report such an account to the US Department of Treasury. All taxes on income from such a statement must also be paid. The exception is "signature authority accounts."


Tax Compliance Act for Foreign Account

In 2010, Congress passed the (FATCA) Foreign Account Tax Compliance Act even though it took effect four years later. FATCA forced compliance from banks all over the world to agree to their standards. 

FATCA mandated all non-US banks to report all American Accounts with more than $50,000 or be faced with severe penalties. Such penalties include exclusion from the US market or a withholding penalty of 30%. Less than a year after, over 100,000 foreign banks complied to share information. Canada was the only global economy that revolted. 

With FATCA, Uncle Sam got account numbers, names, balances, addresses, and ID numbers of American account holders. US citizens operating foreign accounts need to submit Form 8938 alongside the FBAR form. Anyone that wants to open an offshore account needs to comply with the requirement and be aware of the tax penalties. All foreign accounts, regardless of whether they generate taxable income or not, must be reported to Uncle Sam.


Tax Evasion and Foreign Bank Account 

There are millions of Americans with offshore accounts, and they operate them for various reasons. There are millions of Americans living abroad, yet the number that file FBAR was less than a million in 2016. 

The implication is that a considerable number of foreign account holders were not reporting their properties. Over the years, however, Uncle Sam has emphasized compliance. As a result, Americans will likely face stiff penalties for non-compliance. This can amount to half a million dollars in fine and a jail time for up to 10 years for failure to declare assets via FBAR. 

More than nondisclosure, failure to file and pay income taxes on funds earned in a foreign account is a pretty serious offense. There can be criminal and civil charges on such individuals even if they claim they are not aware. 


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