For US Citizens and Green Card holders 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 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.
US Persons 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 a US Person 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.
The three main considerations
- Any U.S. citizen with foreign bank accounts with the aggregate value, at any time during the natural year, of more than $10,000 must declare them to the U.S. Treasury on FinCEN Form 114, and with a higher threshold, on the income tax returns to the IRS on Form 8938.
- 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 Spain, sometimes, must pay income taxes to both the Spanish government and the U.S. federal government. If the American expatriate deposits their monthly earnings into any kind of European Mutual Funds, 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. Be aware of the fiscal implications for the IRS of what they design as PFICs
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 report 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 elaboration. 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 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. U.S. Persons 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 and/or savings accounts abroad, which have their own unique treatment, as PFICs
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.
Please do not hesitate to contact us, if you are confused with the information published or have any further doubts.
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