Whether you live abroad or stateside, there are advantages to using foreign bank accounts. Like offshore tax investments, it is important to know what you are doing, and to be aware of potential downsides of these types of accounts.
Offshore accounts have advantages, including privacy, stability if your home economy is prone to destabilization, and access to funds while living abroad. While it sounds good, it is important to consider some of the complicating factors of foreign accounts. Let’s walk through a few:
- Compliance: The IRS is interested in your money, wherever it is. You are responsible for taxes on income earned anywhere in the world. In order to track your assets and income, the U.S. enforces stringent compliance requirements on foreign bank accounts and the institutions that hold them. Enhanced compliance can make both you and your foreign bank nervous. In recent years, the long-arm of the IRS has frequently reached abroad to levy penalties against institutions that do not comply with its reporting requirements.
- Reporting: Offshore financial compliance takes the form of detailed reports. Some of the reports you may need to file include the Report of Foreign Bank and Financial Accounts (FBAR) (Form FinCen 114), the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gift (Form 3520), and the Annual Information Return of Foreign Trust with a US Owner (Form 3520-A).
- Penalties for non-compliance: The compliance requirements around foreign accounts are intended to defer tax fraud and tax evasion. Given the length of time reporting requirements have been in place, the IRS is not likely to consider lack of knowledge as a reason for failure to file annually due reports. The distinction between a willful and non-willful mistake is critical. Penalties for non-willful errors are less severe and less likely to proceed toward an IRS criminal tax investigation.
For non-willful penalties involving missing FBAR reports, as of 2024, the maximum penalty is $15,611 per violation. For willful violation of compliance rules around FBAR reporting, the penalty is 50 percent of the amount in the delinquent account or $156,107—whichever is greater.
Despite the compliance hoops, a foreign bank account could help you with the service and wealth protection you are looking for. When you consider offshore (or onshore) accounts, speak with a skilled tax attorney in your area.
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From offices in Chicago and Cleveland, the tax attorneys at Robert J. Fedor, Esq., LLC help individuals and entities nationwide respond to allegations of tax crime, IRS audits, and other tax controversy. When you need responsive, legal advice locally or abroad, contact us or call 800-579-0997.
