How to Comply with US Tax Law when you have a Foreign Bank Account

Foreign bank accounts can be a valuable tool for individuals and businesses looking to invest or conduct business abroad. Individuals may also have them to send money to family, or because they recently became U.S. citizens. In either case, it's important to remember that foreign bank accounts must be properly reported to the Internal Revenue Service (IRS) in accordance with US tax law. Failure to report these accounts can result in significant penalties and legal consequences. In this blog post, we'll explore the reporting requirements for foreign bank accounts under US tax law, discuss the relevant penalties, and provide examples of how failure to comply can result in serious consequences.

Reporting Requirements for Foreign Bank Accounts

The reporting requirements for foreign bank accounts are set forth in two separate forms: FBAR and Form 8938.

FBAR, or the Report of Foreign Bank and Financial Accounts, is required to be filed by US persons who have a financial interest in or signature authority over foreign bank accounts that have an aggregate value of over $10,000 at any time during the calendar year. This includes not only bank accounts but also other financial accounts, such as brokerage accounts and mutual funds. The FBAR is due by April 15th of each year, with an automatic extension until October 15th.

Form 8938, or the Statement of Specified Foreign Financial Assets, is required to be filed by US taxpayers who have specified foreign financial assets that exceed certain thresholds. These thresholds vary depending on whether the taxpayer is filing jointly or separately and whether the taxpayer lives in the US or abroad. For example, a US taxpayer who is married filing jointly and lives in the US must file Form 8938 if the total value of their specified foreign financial assets is greater than $100,000 on the last day of the tax year or greater than $150,000 at any time during the tax year. Form 8938 is due at the same time as the taxpayer's federal income tax return, including extensions.

Relevant Penalties

Failure to comply with the reporting requirements for foreign bank accounts can result in severe penalties. The penalties for failure to file FBARs or Form 8938s are as follows:

FBAR Penalties:

• Non-willful violation: Up to $10,000 per violation.

• Willful violation: The greater of $100,000 or 50% of the balance in the account at the time of the violation, per violation.

Form 8938 Penalties:

• Failure to disclose: $10,000 per year.

• Continuing failure to disclose: An additional $10,000 for each 30-day period of non-disclosure, up to a maximum of $60,000.

• Understatement of tax attributable to undisclosed foreign financial assets: Up to 40% of the understatement of tax.

It is important to note that the penalties for failure to report foreign bank accounts can be imposed even if the taxpayer did not intend to evade taxes or conceal the accounts. This means that even if a taxpayer simply forgets to file the required forms, they can still be subject to penalties.

Examples of Penalties for Failure to Comply

The consequences of failing to comply with foreign bank account reporting requirements can be severe, as illustrated in the following examples.

Example 1: John is a US citizen who has a foreign bank account with an aggregate value of $200,000. John failed to file an FBAR for this account for three years. John's failure to file the FBAR was deemed willful, and he was assessed a penalty of $300,000 (50% of the account balance at the time of the violation).

Example 2: Sarah is a US citizen who has a foreign bank account with an aggregate value of $100,000. Sarah failed to file Form 8938 for this account for three years. Sarah was assessed a penalty of $30,000 ($10,000 per year for each year the form was not filed).

International tax compliance is incredibly difficult. A tax attorney at Safeguard Law, PLLC can help you comply with the IRS and avoid hundreds of thousands in penalties.