What is the US tax impact of opening a foreign account for a US taxpayer including foreign nationals who live and work in the United States? The requirement for US taxpayers to report offshore accounts has been around for quite some time. In 2004, the IRS added penalties for non-willful disclosure and heavy penalties and the potential for criminal prosecution for willful avoidance of reporting requirements. The IRS tightened reporting requirements in 2014 requiring all US taxpayers to disclose all foreign accounts annually on the Foreign Bank and Financial Account Report or FBAR if the accumulated balance of those accounts exceeds $10,000 at any point in a tax year. The IRS is concerned that a taxpayer will use foreign accounts in an attempt to shield themselves from US taxes.
The United States taxes its citizens and those who live and work in the US on all income worldwide, not just income received in the US. This includes income realized in foreign investments or accounts. Most people wrongly assumed that these regulations only applied to the wealthy who used Swiss accounts to hide money and evade US taxation. The reality is quite different. There are a number of legitimate reasons for a US taxpayer to open an offshore bank or investment account. Many foreign nationals who reside or work in the US and those who are here on an H1-B visa arrive in the US with existing offshore bank accounts in their native country. If you live or work in the US you carry the same reporting requirements as a US taxpayer, and those accounts must be disclosed if the accumulated balance of all offshore accounts exceeds the $10,000 threshold at any point in the year.
The US State Department, the US Justice Department and the IRS have released estimates of more than 10 million US taxpayers with offshore bank accounts. The IRS recently reported that less than 1 million of these taxpayers filed annual FBARs to disclose these accounts. The penalties for the failure to come into IRS FBAR compliance are quite severe. The US tax impact of opening a foreign account or arriving in the US with foreign accounts is a serious matter. Failure to disclose these accounts exposes the US taxpayer to draconian penalties up to 50% of the highest accumulated balance for each tax year of these accounts, or $100,000 per incidence whichever is higher. In addition, the taxpayer faces criminal exposure to prosecution and up to 10 years in jail for tax evasion.
The IRS is now receiving direct electronic information from hundreds of thousands of banks, investment houses and tax agencies around the world providing specific account data including balances, transactions and the identification of the owner(s) of the “beneficial interest” in the account(s). The IRS has to simply compare this information with the data provided by a US taxpayer to catch anyone who has not fully complied with FBAR reporting requirements. What follows next is an IRS audit, substantial financial penalties and the genuine risk of prosecution.
Allen Barron is uniquely positioned to serve those with foreign bank or investment accounts. Our international and domestic tax attorneys provide the protection of the attorney client privilege as we work through your unique circumstances. We help you to understand your options and the advantages and disadvantages of the OVDP or Streamlined disclosure programs. If you are concerned about the US tax impact of opening a foreign account or have not fully disclosed your offshore bank and investment accounts we invite you to contact us for a free consultation at 866-631-3470.