If you travel frequently or do business abroad, it may be convenient to have a bank account in a foreign country. However, you should comply with IRS tax requirements when reporting on such accounts, or it could land you in trouble.
The IRS definition of a foreign account is not limited to bank accounts. It includes securities accounts, prepaid credit cards, retirement and pension accounts. There are some exceptions to this, and it is crucial to have all the information beforehand to avoid violating tax requirements.
What should you report to the IRS?
A Foreign Bank Account Report (FBAR) is required if the combined balances of the accounts you own or have signature authority or financial interests are more than $10,000 at any point during the calendar year.
In this context, financial interest is determined by the owner of record or legal title and whether the account is maintained for your benefit or that of others. Signature authority means the legal right or authority to operate accounts through direct communication with the institution.
When and how should you file?
Filing is done electronically, although it is possible to paper-file or have someone do it on your behalf.
The FBAR is supposed to be filed annually with a similar deadline to your income tax returns, on April 15, with an automatic extension to October 15 if you cannot beat the initial deadline. Further extensions are possible depending on individual circumstances.
Penalties of non-compliance
Failure to file your FBAR could result in penalties such as fines or criminal proceedings against you. The consequences depend on the extent of your violations, and you could be facing hundreds of thousands of dollars in fines.
Learning more about the tax requirements one must abide by is necessary if you are thinking of or already have financial interests in a foreign country.