Foreign Bank Accounts: Reporting & Tax Rules That You Have to Worry About

Chances are you’ve heard stories about rich people hiding their money in Swiss bank accounts.

Owning a foreign bank account as a U.S. resident isn’t something you should take lightly.

If your foreign bank account balances exceed certain limits, you may be required to report your foreign bank accounts to U.S. agencies.

Here’s what you need to know as a person. Businesses may have reporting requirements, too, but that’s a topic for another day.

While the below information is correct to the best of our knowledge, these regulations are complex and often need professionals to assess your situation.

As with any financial compliance issue, you should make sure you consult with your financial advisor or accountant.

Then, you can make sure you’re complying with the rules related to foreign bank accounts based on your situation.

Do You Have to Report All Foreign Bank Accounts?

So who determines if you need to report your foreign bank accounts?

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has specific reporting requirements for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

However, different reporting requirements exist for the Internal Revenue Service (IRS). They require you to fill out Form 8938, Statement of Specified Foreign Financial Assets.

Both forms relate to foreign bank accounts, but the rules for reporting are different. That said, you may not have to report all foreign bank accounts.

Here’s what you need to report for each form:

FinCEN’s Form 114 FBAR

You must file an FBAR form if you’re a US person that has an interest in a foreign financial account and you meet the reporting threshold.

You have a financial interest if you’re the owner of record or the holder of legal title of the account as well as in other specific situations.

You are also considered to have an interest if you have signature authority on the account.

Essentially, that means you’re able to control how funds in the account are used by telling the bank how to manage the funds.

To be required to file, your financial accounts must have a total value that exceeded $10,000 at any time during the calendar year.

Now:

If you exceed the $10,000 threshold, you must report all foreign accounts, not just any single account that exceeds $10,000.

IRS Form 8938, Statement of Specified Foreign Financial Assets

You must file Form 8938, Statement of Specified Foreign Assets, if you’re a US citizen, resident alien or a qualifying non-resident alien, you have interest in specified foreign financial assets and you meet other requirements.

For a complete list of what specified assets are, visit this IRS page.

You have an interest in an account if any income, gains, losses, deductions, credits, gross proceeds or distributions from holding or disposing of the account would require reporting them on your tax return.

For an unmarried individual or a person filing a tax return as married filing separately that lives in the U.S., you’ll need to file this form if the total value of your specified assets was more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Those amounts are doubled to $100,000 and $150,000 for married individuals filing jointly.

If you’re living outside the U.S., unmarried individuals or those filing married filing separately must file this form if the total value of your specified assets was more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.

Those amounts are doubled to $400,000 and $600,000 for married individuals filing jointly.

How Do You Report Foreign Bank Accounts

You should take reporting foreign bank accounts very seriously. You need to make sure you do it right and by the proper deadline.

If you often struggle to figure out how to file your tax return, it may be best to pay a professional to handle the reporting requirements for you.

Yet, if you’re an expert at following the often complex instructions for IRS forms and FinCEN’s Form 114, you may be able to handle the reporting yourself. If you want to give it a shot yourself, here are the two major forms you should take a look at.

FinCEN’s Form 114 FBAR

To report foreign bank accounts to FinCEN, you’ll need to use Form 114 Report of Foreign Bank and Financial Accounts.

You don’t have to worry about mailing the form in. Form 114 must be e-filed using FinCEN’s BSA E-Filing System. Follow the instructions on how to fill out the form.

You’ll report the maximum value of your accounts that are physically located in a foreign country in U.S. dollars.

You do this by finding the maximum value of the account during the year in the foreign currency. Then, you convert it to US dollars by using the exchange rate at the end of the year.

You should file FinCEN Form 114 FinCEN by April 15th of each year, but the deadline may change due to holidays.

In 2018, you get an automatic six-month extension if you miss the deadline and must file by October 15th, 2018.

IRS Form 8938, Statement of Specified Foreign Financial Assets

To report foreign bank accounts to the IRS, you’ll use IRS Form 8938, Statement of Specified Foreign Financial Assets.

You’ll file this form with your tax return. The deadline is the same as your tax return, including any extensions you may qualify for.

To report the value of your accounts, you’ll need to find the maximum value of the assets during the year.

Then, convert them to fair market value in US dollars. You’ll convert to US dollars using the exchange rate at the end of the taxable year.

Taxes on Foreign Bank Accounts

You don’t pay a tax for owning a foreign bank account.

The United States taxes US citizens on their income no matter where they earn it.

That means if you’re living in France and earn income in France, you may still have to pay US income taxes on that income.

The IRS and FinCEN want to know about your foreign bank accounts. They want to make sure you’re paying the proper U.S. income taxes on all income you earn.

If they’re aware of the bank accounts, they can make sure you’re paying taxes on the income you deposit in those accounts. Individuals may not have to report all foreign bank accounts.

If you’re traveling the world as a retired person and no longer earn income. It may make sense to deposit money in a foreign bank account to make traveling easier.

In this case, you wouldn’t have any income deposited in the accounts.

Because of that, you wouldn’t have to pay taxes on your bank account. That said, you still have to report them if you meet the reporting requirements. If you earn interest on your bank account, that interest would be taxable.

Taxation is a complicated topic. There are deductions and tax credits that could allow you to reduce the amount of income tax you pay on foreign earned income.

You should consult with a tax professional if this applies to you.

What Happens If You Don’t Report Foreign Bank Accounts

So what happens if you don’t report your foreign bank accounts as required by FinCEN’s Form 114 and IRS’s Form 8938? If you fail to report your bank accounts, you could be hit with financial and even criminal penalties.

FinCEN’s Form 114 FBAR

If you don’t report your accounts as required by Form 114, you may face civil monetary penalties. These penalties are adjusted annually for inflation.

For non-willful penalty assessments before August 1, 2016, penalties can range up to $10,000.

If it is determined to be willful, the penalty could be up to the greater of $100,000 or 50 percent of the account balances.

If willful, you may also face criminal penalties.

IRS’s Form 8938

If you don’t report your account as required by Form 8938, you face up to a $10,000 penalty. The penalty is for failure to disclose the assets.

Additionally, you’ll face an extra $10,000 penalty for every 30 days you don’t file after the IRS notifies you of a failure to disclose.

This can add up to a maximum penalty of $60,000. You may also face criminal penalties.

Follow the Law

If you hold a foreign bank account, it’s best to speak with a professional. Professionals can help guide you through the filing requirements.

They can examine your particular situation to determine whether you must file either FinCEN Form 114 or IRS Form 8938.

The penalties for not filing either form when you are required to are stiff. Do the right thing. Follow the requirements to make sure you don’t end up paying pointless penalties. You may also want to consider online banks as an alternative.