The Basics of Reporting Foreign Bank Accounts on Your Taxes

Americans with foreign bank accounts were once able to rely on secrecy with the IRS. Foreign bank secrecy was a longstanding tradition in many cultures, including the United States. Rampant offshore banking has significantly worn down this tradition and failure to report a foreign account is now considered criminal activity.

What Happened To Offshore Banking?

The IRS has sued the Swiss Global financial services company (UBS) claiming that they encourage American investors to hide income within unreported offshore accounts. After settling criminal charges, the UBS handed over around 52,000 undeclared foreign American accounts. The IRS is also beginning to target other common offshore bank sites.

What’s the Problem?

Not reporting the existence of a foreign account on your Report of Foreign Bank and Financial Account Form (FBAR) can result in serious fines and penalties. The biggest issue with the IRS is that taxes on foreign income earned with the foreign bank are not being paid. This can carry significant civil and criminal consequences leading to fines, penalties, and even jail time.

What Should I Do?

The best preemptive option is a “Voluntary Disclosure.” The IRS Voluntary Disclosure Program proposes a reduced penalty and promises no criminal prosecution. This is better than a “Quiet Disclosure” which involves amending past taxes, but still leads to criminal charges due to unpaid penalties.

Final Word

Failing to amend a rule-breaking foreign account puts you at serious risk and may subject you to severe penalties in the event of discovery. The IRS will only continue to crack down harder on foreign accounts in the future.

Image credit: Colin