It is common for high-net-worth Americans and expats to have foreign bank accounts. But whether you are an expat or trying to reduce your tax burden, you need to know a few crucial things.
Most importantly, you need to report your foreign bank account to the IRS. You could face a more than $100,000 penalty if you don’t.
Who Needs to Report Foreign Bank Accounts?
The requirement for reporting foreign bank accounts to the IRS is fairly straightforward. It applies if the combined balances of your foreign accounts were at least $10,000. Importantly, your balance only needed to reach $10,000 once during the year. Even if it was only $10,000 or higher for one day, you must report it. This is even true if it didn’t earn any income.
It Isn’t Limited to Your Accounts
This law does not just apply to accounts solely in your name. Americans must also report any accounts where they have signature authority or financial interest.
In practice, if you oversee someone’s account, you may need to report it. The relevant law has loose definitions, so there is some leeway.
The Maximum Penalty
The penalty for not reporting your foreign account will vary based on the size of the account and whether your lack of reporting was “willful.” The penalty is half of the balance you didn’t report, or $129,210. You can be fined the larger of the two amounts.
By contrast, if the violation was “non-willful,” the fee caps at $12,921. This could apply to mistakes or lack of knowledge.
When You Must File By
Starting in 2016, the deadline for filing the FBAR is the same as tax day. If, however, you haven’t filed by then, you get an automatic extension. This lasts until October 15.
So, even if you missed this year’s April 18 deadline, you still have until October to avoid penalties.
What If You Didn’t Know About the FBAR?
If you weren’t aware of the FBAR, you should correct your error immediately. The Streamlined Procedure is specifically for expats who didn’t know they had to file the FBAR. It also applies to taxes.
You will not pay the penalty if you use this Streamlined Procedure. You must, however, file the most recent three tax returns and six FBARs. Moreover, you must state that your non-filing was non-willful.
The Relevant Law
If you want to learn even more about the reporting requirement, you can turn to the relevant law. This is the Bank Secrecy Act of 1970. That act was designed to prevent money laundering. The law requires you to file an FBAR. This stands for Report of Foreign Bank and Financial Accounts.
As mentioned above, the law requires you to file an FBAR if the combined value of your foreign holdings is more than $10,000. That balance applies to any time of the year. You must report the balance and account even if the account or funds didn’t generate profit.
Filing the FBAR Is Different from Filing Taxes
Part of the issue for many Americans is that they aren’t aware of the FBAR requirement. And those that do know about it may expect to include it in their taxes. But most commercial tax software doesn’t support it.
You can only file the FBAR via Report 114 from the Financial Crimes Enforcement Network.
The Amount That You Report Is Different as Well
The other difference from taxes comes from the value you report. With typical taxes, you would report the year-end total of your account. By contrast, the FBAR has you report the maximum balance of the account throughout the year. So, even if your account averaged $5,000 and had a single day at $20,000, you would have to report $20,000.
But don’t worry; you don’t pay taxes on that $20,000.
Americans need to report any foreign bank accounts with balances of at least $10,000 at any point during the year. Failing to file can lead to a penalty of nearly $130,000 or half the account balance. If you weren’t aware, you could file now via the Streamlined Procedure to avoid penalties.
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