Are Expats Required to Disclose Foreign Accounts to the IRS?

Are Expats Required to Disclose Foreign Accounts to the IRS?

Expat Foreign Bank Account Reporting

When US persons have ownership or interest in a foreign bank account or other foreign financial accounts, such as an investment account, mutual fund account — or even a foreign life insurance policy or pension plan — they are required to report the information to the IRS. Whether or not the bank account was opened before or after the person became a US person is not dispositive as to whether or not they have a reporting requirement. In other words, as long as the individual is a US person (US Citizen, Lawful Permanent Resident, or foreign national who meets the Substantial Presence Test) and has one or more foreign bank accounts in which the total aggregate value of all accounts exceeds $10,000, they will have a reporting requirement on at least the FBAR – if not other international reporting forms as well.  Let’s look at six fast facts about reporting foreign bank accounts.

Worldwide Foreign Assets

From a baseline perspective, it is important to keep in mind that the US government requires US persons to report their global income and disclose their foreign assets on various international information reporting forms each year. Thus, as long as a person meets one of the tests for being a US person for tax purposes, they will fall into the category of persons who may have to report their foreign bank accounts if they meet the threshold requirements for reporting.

Accounts Pre-Date Becoming a US Person

One common misconception is that taxpayers only have to report accounts that were opened after becoming a US person, but that is not correct. Whether the account was opened before or after they became a US person is not relevant for reporting purposes.

No Income Generated

Just because the foreign bank account may not generate any interest or other income does not mean it can escape having to be reported to the IRS. In other words, there is no exception to having to report foreign bank accounts just because an account may not generate any income. For purposes of foreign bank account reporting, the taxpayer has to disclose the account values — and whether or not the account generates income is not relevant for reporting purposes.

Dormant Foreign Bank Accounts

Even if a foreign bank account is dormant — and even if it has been dormant for many years — as long as the account is open, it has to be reported presuming that the taxpayer meets the threshold reporting requirements. For example, if a taxpayer has one overseas account with $100,000 in it and 10 dormant accounts, then the filer would have to report all 11 accounts for reporting purposes.

Money is Not Yours

For FBAR purposes, it does not matter if the account is owned by the taxpayer or not. For example, let’s say a US person has a joint account with a foreign non-resident alien parent. Even if that account has $1 million in it and none of the money in the account belongs to the US person if the US person has ownership or even signature authority over the account (and no ownership of the funds) they would still file the annual FBAR.

*Other forms may not be required if the person does not actually own the money and does not have an interest in the funds.

Foreign Bank Account Reporting is More Than Just FBAR

When it comes to reporting foreign bank accounts to the IRS, the first form that many taxpayers are familiar with is the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114). But, the FBAR is just one of several international information reporting forms a taxpayer may have to file. Depending on whether a filer also has ownership of foreign investment funds, entities, trusts, or gifts may result in significantly more reporting than just the FBAR.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the 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. When a person is non-willful, 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 willful 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

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