For Americans who hold assets with foreign institutions, for whatever reason, the tax ramifications are an area of serious concern. The Internal Revenue Service (IRS) treats money held in foreign banks differently than money held in domestic bank accounts. To put it bluntly, they don’t like U.S. citizens having offshore or overseas accounts—mostly out of fear of being unable to take revenue from such accounts—and so they discourage the practice.
And frankly, most foreign banks nowadays do not want deposits from U.S. citizens, either—not even those in the traditional destinations, such as Switzerland and the United Kingdom. Their reluctance is due to the increased aggressiveness from the IRS and the Department of Justice (DOJ). Foreign banks are only willing to devote so much time and energy to courting American clients, and very few have the type of compliance department that can handle complex U.S. regulations and heightened scrutiny.
Americans who want to open foreign bank accounts should consider these hurdles and do what they can to clear up credit concerns or other risk flags. Simply being an American citizen who is subject to IRS taxation can make an overseas bank hesitate, so it is a good idea to seem less risky on an individual level.
- Any U.S. citizen with foreign bank accounts totaling more than $10,000 must declare them to the IRS and the U.S. Treasury, both on income tax returns and on FinCEN Form 114.
- The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report account numbers, balances, names, addresses, and identification numbers of account holders to the IRS.
- The federal government can bring civil and criminal charges against those who fail to disclose foreign accounts or pay taxes on foreign account assets.
Double Taxation of U.S. Expatriates
Unlike almost every other country on the planet, the U.S. 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. In fact, the U.S. is the only developed nation that taxes global activity.
What this means is an American expatriate living and working in Germany, say, has to pay income taxes to both the German government and the U.S. federal government. If the American worker deposits their monthly earnings into a German bank, the IRS can grant itself access to that account to collect taxes. There are some relief provisions, including a partial credit for foreign taxes paid on overseas income, but they are often insufficient.
Not all foreign account holders engage in economic activity abroad, which means they do not have to worry about this double taxation. However, concerned workers and investors need to file returns with the IRS.
FinCEN Form 114
Since foreign accounts are taxable, the IRS and U.S. Treasury have a very rigid process for declaring overseas assets. Any American citizen with foreign bank accounts totaling more than $10,000 in aggregate, or at any time during the calendar year, is required to report such accounts to the Treasury Department. They are also required to report and pay tax on all income from these accounts, except so-called “signature authority accounts.”
From the 1970s until June 2013, foreign account holders filed under Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, better known as an FBAR. Forms were due annually and processed in the Treasury office in Detroit.
After June 2013, the Treasury announced the paper-based FBAR was no longer acceptable. Instead, all U.S. taxpayers with offshore accounts totaling more than $10,000 needed to electronically fill out the new Financial Crimes Enforcement Network (FinCEN) Form 114, also titled FBAR. FinCEN 114 included more information and had to pass through the Treasury’s Bank Secrecy Act E-Filing System. This new FBAR did not replace an income tax filing but was instead a separate document to be submitted individually. Taxpayers had until June 30, 2014, to file the new form, or else be subject to a penalty of as much as 50% of their assets.
The Foreign Account Tax Compliance Act
Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010 without much fanfare. One reason the act was so quiet was its four-year-long ramp up: FATCA did not take effect until 2014. Never before had a single national government attempted, and so far succeeded in, forcing compliance standards on banks across the world.
FATCA requires any non-U.S. bank to report accounts held by American citizens worth over $50,000 or else be subject to 30% withholding penalties and possible exclusion from U.S. 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 the FATCA. The only major global economy to fight the Feds is Canada; however, it was private citizens, not the Canadian government, who filed 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 abroad, which have their own unique treatment.
All foreign accounts held by U.S. taxpayers need to be reported to the IRS, even if the accounts do not generate any taxable income.
Foreign Bank Accounts and Tax Evasion
The colloquial image of offshore tax evasion includes a multi-millionaire U.S. citizen who has an ultra-secret bank account in Geneva. In reality, millions of Americans—including expatriates and dual citizens—open offshore bank accounts for a huge number of reasons. Whether they report them is a different story.
The U.S. State Department estimated that roughly 9 million Americans lived abroad in 2016; the Federal Assistance Voting Program’s “2016 Overseas Citizen Population Analysis Report”, issued in September 2018, put the number at 5.5 million. It’s safe to guess that many millions more living stateside have foreign accounts. Yet less than 1 million taxpayers filed FBARs to declare these assets in 2016.
Obviously, plenty of foreign account holders are not reporting assets. Since 2009, however, the IRS has emphasized compliance, and Americans are more likely than ever to face stiff fines and penalties for nondisclosure. Individuals can be penalized with up to $500,000 and a prison sentence of up to 10 years for failure to file an FBAR.
Even more serious than non-disclosure is a failure to pay taxes on income earned and deposited into a foreign bank account. The federal government can bring civil and criminal charges against those who do not pay Uncle Sam, even by accident.
How Do You Report Foreign Bank Accounts?
If you are a U.S. person with more than $10,000 in overseas bank or brokerage accounts, you must fill out a Foreign Bank and Financial Account (FBAR) on FinCEN form 114. You can file it online through the Bank Secrecy Act e-filing system. Moreover, if your overseas assets exceed $50,000, you must also file IRS form 8938 when you file your taxes.
Do Foreigners in the U.S. Pay Taxes?
If you are a resident alien in the U.S., you must pay U.S. taxes like any other U.S. person. Nonresident aliens only have to report income that comes from U.S. sources or is connected to U.S. businesses, and they are not taxed on their interest income unless it is connected to a U.S. source. If you are a resident alien for part of the year, you must report all income for that part of the year that you are a resident alien, and only U.S.-sourced income for that part when you are not a resident alien.
Do You Have to Pay Taxes on Overseas Income?
U.S. residents are required to report and pay taxes on all of their income, even that earned overseas. However, there is an exception: U.S. citizens who live overseas do not have to pay federal income tax on the first $120,000 of income in 2023, and that amount is adjusted for inflation every year.
The Bottom Line
Under the Bank Secrecy Act, U.S. taxpayers must report their overseas bank accounts and financial assets, even if those assets do not generate taxable income. You must report any account with more than $10,000, or if your combined accounts have a total value greater than $10,000. In addition, overseas banks are required to report their U.S.-owned accounts or risk exclusion from U.S. markets.