Simone Lawson
The U.S. government levies taxes on its citizens' income earned anywhere in the world, including foreign financial accounts. This means that U.S. citizens with foreign accounts must report them to the IRS by filing a Report of Foreign Bank and Financial Accounts (FBAR). This requirement applies to U.S. citizens with financial interests or authority over foreign accounts with an aggregate value of more than $10,000. Foreign financial accounts can include bank accounts, brokerage accounts, mutual funds, and retirement accounts, among other types of financial instruments. Failure to disclose these accounts and pay taxes on them can result in civil and criminal penalties.
| Characteristics | Values |
|---|---|
| Type of account | Bank account, brokerage account, mutual fund, unit trust, retirement account, etc. |
| Location of account | Any area outside the United States, including its territories and possessions |
| Account holder | U.S. citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates |
| Reporting requirements | Annual Report of Foreign Bank and Financial Accounts (FBAR), Form 8938 (Statement of Specified Foreign Financial Assets), FinCEN Form 114 |
| Threshold for reporting | Aggregate value of foreign financial accounts exceeding $10,000 during the calendar year |
| Due date for FBAR | April 15 or June 30 (with some exceptions) |
| Record-keeping requirements | Maximum value during the year, kept for five years from the FBAR due date |
| Exemptions | Accounts maintained on a U.S. military banking facility, certain retirement accounts, trusts, consolidated FBAR reporting |
| Penalties for non-compliance | Civil and criminal charges, monetary penalties, withholding penalties, exclusion from U.S. markets |
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What You'll Learn
Reporting requirements
The US government requires its citizens to report their overseas bank accounts and financial assets, even if those assets do not generate taxable income. This includes US residents, citizens, corporations, partnerships, limited liability companies, trusts and estates.
The Report of Foreign Bank and Financial Accounts (FBAR) is an annual report required by the IRS of US persons who maintain a certain threshold of money in a foreign account. The threshold is $10,000—if the value of the account exceeds this amount at any time during the reporting year, an FBAR must be filed. This includes bank accounts, brokerage accounts, mutual funds, unit trusts, and other financial accounts. The FBAR is not filed with the taxpayer's income tax return but directly with the Treasury Department electronically.
The FBAR requires account numbers, taxpayer identification number, country in which the account is held, and maximum value during the year. Records must be kept for five years from the due date of the FBAR.
There are some exceptions to the FBAR filing requirements. For example, you don't need to report foreign financial accounts that are maintained on a US military banking facility, held in an individual retirement account (IRA) of which you are an owner or beneficiary, or held in a retirement plan of which you are a participant or beneficiary. Additionally, if you jointly own all your foreign financial accounts with your spouse, and your spouse reports the jointly owned accounts on a timely-filed signed FBAR, you do not need to file a separate FBAR.
It is important to note that failing to disclose foreign accounts or pay taxes on foreign account assets can result in civil and criminal charges. The IRS can assess penalties for failing to disclose the existence of the accounts and for failing to report income for US tax purposes from these accounts.
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Tax evasion
The Foreign Account Tax Compliance Act (FATCA) is a federal law that requires US citizens to disclose foreign account holdings annually to prevent tax evasion via offshore accounts and assets. FATCA also places strict reporting requirements on foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs), requiring them to disclose the identities of US citizens with foreign accounts and the value of those accounts. The US government levies taxes on its citizens on income earned anywhere in the world, even if the activity took place exclusively on foreign soil, with foreign capital, and with foreign trading partners.
US citizens with foreign accounts must submit Form 8938, Statement of Specified Foreign Financial Assets, to the IRS. This requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is used to report a financial interest in or authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
FATCA requires any non-US bank to report accounts held by American citizens worth over $50,000 or else be subject to 30% withholding penalties and possible exclusion from US markets. FATCA has led to a decrease in investment in the US financial market by foreign investors. The number of US citizens' bank account closures by foreign banks has also increased to avoid compliance with FATCA.
The IRS rigorously enforces reporting requirements on financial accounts abroad or in offshore tax havens. Foreign financial institutions and account holders are required to file reports with the IRS, which compares the reports to ensure appropriate taxes are paid on monies held worldwide.
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Tax implications
The US government levies taxes on its citizens' income earned worldwide, including income earned in foreign countries. This means that US citizens living and working in foreign countries may have to pay income taxes to both the foreign government and the US federal government.
US citizens with foreign bank accounts are required to report these accounts to the Treasury Department and the IRS if the total value of all foreign accounts exceeds $10,000 at any time during the calendar year. This is done by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114. The FBAR is a separate filing from an income tax filing and must be submitted by June 30th of the year following the calendar year of reporting.
Failure to properly file an FBAR can result in severe penalties, including civil and criminal charges, and even penalties of up to 50% of the taxpayer's assets. US citizens with foreign accounts may also be required to submit Form 8938 to the IRS in addition to the FBAR.
Additionally, under the Foreign Account Tax Compliance Act (FATCA), non-US banks are required to report accounts held by American citizens worth over $50,000. Banks that do not comply with FATCA risk facing 30% withholding penalties and possible exclusion from US markets.
It is important to note that the tax implications of holding foreign accounts can be complex, and US citizens with foreign accounts should seek professional advice to ensure they are complying with all relevant laws and regulations.
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Jointly owned accounts
If you are a U.S. person, including a citizen, resident, or green card holder, and you jointly own foreign financial accounts with your spouse, you may need to report these accounts to the U.S. government. This is done by filing a Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114 or 114A. The requirement to file an FBAR depends on the aggregate value of the foreign financial accounts and whether you have signing authority or control over the disposition of assets in those accounts.
If the aggregate value of the jointly owned foreign financial accounts exceeds $10,000 at any time during the calendar year, you generally need to report them by filing an FBAR. However, there are exceptions to this requirement. For example, if all the financial accounts are jointly owned with your spouse, and you have completed and signed Form 114A, authorising your spouse to file on your behalf, you can report the jointly-owned accounts on a single FBAR. This must be filed electronically and signed by June 30.
It is important to note that if you do not meet the requirements for joint reporting, you may need to file separate FBARs and report the entire value of the jointly-owned accounts. Additionally, if your spouse is not a U.S. person and you do not have signing authority or access to their foreign financial accounts, those accounts do not need to be reported on your FBAR.
In summary, the reporting requirements for jointly owned accounts can be complex, and it is always recommended to consult with a tax professional or accountant to ensure compliance with FBAR regulations.
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Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest. FFIs are encouraged to either directly register with the IRS to comply with FATCA regulations or comply with the FATCA Intergovernmental Agreements (IGA) treated as in effect in their jurisdictions.
FATCA requires any non-US bank to report accounts held by American citizens worth over $50,000 or else be subject to 30% withholding penalties and possible exclusion from US markets. By mid-2015, more than 100,000 foreign entities had agreed to share financial information with the IRS. Even Russia and China agreed to FATCA. The only major global economy to fight the Feds is Canada; however, it was private citizens, not the Canadian government, who filed a suit to block FATCA under the International Governmental Agreement clause, making it illegal to turn over private bank account information. Through FATCA, the IRS receives account numbers, balances, names, addresses, and identification numbers of account holders.
Americans with foreign accounts must also submit Form 8938 to the IRS in addition to the largely redundant FBAR form. Those interested in opening a foreign bank account must be aware of these requirements and possible tax penalties, especially for retirement accounts. The number of Americans renouncing their citizenship has risen each year since the enactment of FATCA, from just 743 in 2009 to 5,411 in 2016. Among those who renounced was the then Mayor of London, Boris Johnson, who did so after the IRS taxed the sale of his house in London.
In 2017, bills to repeal FATCA were introduced in Congress. On January 24, 2014, the Republican National Committee passed a resolution calling for the repeal of FATCA. American Citizens Abroad, Inc. (ACA), a not-for-profit organization claiming to represent the interests of the millions of Americans residing outside the United States, asserts that one of FATCA's problems is citizenship-based taxation (CBT). Originally, ACA called for the US to institute residence-based taxation (RBT) to bring the United States in line with all other OECD countries.
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Frequently asked questions
FBAR stands for Report of Foreign Bank and Financial Accounts. It is a report that must be filed by U.S. persons with foreign financial accounts exceeding $10,000 in value during the calendar year.
Any U.S. person, including citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates, must file an FBAR if they have a financial interest in or authority over at least one financial account located outside the United States.
Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, unit trusts, and other financial accounts such as insurance policies with cash value or investment funds.
The FBAR must be filed electronically through the Financial Crimes Enforcement Network's (FinCEN) BSA E-Filing System. Form 114, also known as the FBAR, can be found on the FinCEN website.
The FBAR is typically due on April 15, with an extended due date of October 15. However, the due date may vary, and some sources mention June 30 as the deadline. It is important to check the official FinCEN website for the most up-to-date information.
