Tax Responsibilities That Come With Opening a Foreign Bank Account

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Do you have an investment or offshore bank account in Switzerland, the Caribbean or any foreign country?

If you said yes, then you definitely should report your foreign accounts to the IRS and Treasury.

Besides regular tax filing requirements that everyone must file, those who hold foreign bank accounts must submit additional tax reports to federal agencies. Americans who hold accounts abroad must file a Foreign Bank and Financial Account (FBAR) report.

Reporting requirements for foreign accounts have become a high-profile issue. Don’t get caught with your hand in the cookie jar when it comes to storing money offshore. Here are your tax responsibilities with a foreign bank account.


1. Reporting Your Foreign Bank Account

If your total balance is $10,000 or greater for any calendar year for your foreign bank account(s) and other financial institutions, your accounts must be reported. This is applicable to cases where you're the account holder and those where you are authorized to make transactions.

You must report these using the FinCen Form 114. Bear in mind that an FBAR is filed for each account.


2. Types of Foreign Accounts to Report

If you meet the filing requirement threshold then these types of foreign bank accounts would need to be reported in the FBAR report:

  • Bank accounts 
  • Investment accounts
  • Mutual fund
  • Brokerage accounts
  • Debit card and prepaid credit cards
  • Life insurance 
  • Retirement accounts

For the Treasury Department, the types of accounts to report are listed on the CR Part 1010 form.


3. FBAR AND TAX RETURNS

Any income generated in foreign financial accounts must be reported. Meaning it must be on the income tax return in the year the income is earned. 

In some cases, you may need to file Form 8938, Statement of Foreign Financial Assets. There are separate thresholds that must be disclosed for foreign accounts. This starts at a total foreign account balance of US$50,000 on the last day of the year or US$75,000 at any time during the year.


4. Penalties For Not Filing

There are stiff penalties for not filing your taxes. Two of these are:

Failure to File Penalty 

You can receive a $250,000 fine. You may also get an additional five years in prison for violating filing requirements.

Fraud Penalty 

You can receive a $500,000 fine as a fraud penalty. You may also receive up to ten years in prison for knowingly refusing to file your taxes.

For some tax red flags with foreign bank accounts, an FBAR audit of your accounts might be done.


Final Tips

Knowing which forms to file for your taxes can be confusing especially with a foreign bank account. It isn’t illegal to have a foreign account but it is mandatory to file. Remember, your FBAR must be reported using the FinCEN form 114.

You also need to pay attention to the types of foreign accounts that must be reported, not knowing, is not going to exempt you from being called to task for it.

If you would like more financial tips, please visit the finance section of our website. We offer top tips on accounting, bookkeeping, taxes, banking, and other Frugal Finance resources!

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