- 1 Are Foreign Bank Accounts Legal for US Citizens
- 2 Offshore Tax Haven vs Foreign Accounts
- 3 Who is a US Person for Income Tax and Reporting?
- 4 Did You Acknowledge US Citizenship or Tax Status?
- 5 Have You Reported the Accounts to the US Government?
- 6 Was the Income Generated Abroad Included on US Tax Return
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Golding & Golding: About Our International Tax Law Firm
Are Foreign Bank Accounts Legal for US Citizens
With the globalization of the US economy, it is very common for US persons to maintain both domestic and foreign bank accounts and assets. Whether it is because the US person previously lived overseas, worked in a foreign country, or made international investments — foreign bank accounts are much more customary now than they were in years past. In fact, before the introduction of FATCA (Foreign Account Tax Compliance Act), many Foreign Financial Institutions (FFIs) catered their marketing specifically to US citizens seeking to move their money abroad. These days, with the global crackdown on offshore tax evasion and reporting non-compliance, just finding FFIs to open foreign bank accounts for US Citizens is difficult. And, while it is absolutely legal to own a foreign bank account, there are some additional reporting and tax requirements that US persons should be aware of so that they can remain in IRS tax and reporting compliance and avoid unnecessary fines and penalties. Here are seven (7) important facts about maintaining foreign bank accounts as a US person.
Offshore Tax Haven vs Foreign Accounts
Oftentimes, the terms ‘offshore tax haven’ and ‘foreign bank account’ are used interchangeably — but they are completely different concepts. An offshore tax haven refers to a foreign jurisdiction where taxpayers move funds to avoid US tax – this can be considered illegal depending on the facts and circumstances of the situation. Conversely, merely opening a foreign bank account in a different country is not illegal; it is perfectly legal to open a foreign bank account.
Who is a US Person for Income Tax and Reporting?
It is important to note that the term US Person is not limited to just US Citizens. Rather, the term US persons include US Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test. For any individual Taxpayer that falls into any one of these three categories – unless an exception or exclusion applies — they are subject to US tax on their worldwide income, as well as international reporting for forms such as FBAR and FATCA.
Did You Acknowledge US Citizenship or Tax Status?
When you open a foreign bank account, the Customer Service Representative may inquire as to whether you are a US citizen or not. If you are a US citizen, then you are required to tell them that you are a US Citizen – even if you use a local residence card or driver’s license to open the account. By knowingly not informing the bank that you are a US citizen, this could be considered by the US government as an intent to commit fraud.
Have You Reported the Accounts to the US Government?
For US persons who have ownership of foreign bank and financial accounts, there are various different international information reporting requirements that they must satisfy each year. Two of the most common types of foreign reporting forms include the FBAR and Form 8938 (FATCA). Failure to report the forms may result in significant fines and penalties.
Was the Income Generated Abroad Included on US Tax Return
When a person has a foreign bank or financial account that generates income, even if that income is generated abroad and not repatriated back to the United States, the income is still taxable on a US tax return. If the person already paid foreign taxes, they may qualify for a foreign tax credit to offset or possibly eliminate any US tax liability.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. If a person is non-willful, then they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.