Overseas accounts are a great way to protect your assets and ensure that you are getting the best rate of return on your investments. While there are many good banks in America, not all of them are going to offer the benefits and interest rates that you will be able to find in other countries. And for the most part it is perfectly fine to have that overseas account when you are an American citizen, you just need to keep in mind about claiming this account during tax season.
Even though the overseas account is allowed, you still need to be careful about it. The IRS has gotten the assumption that if you aren’t claiming these accounts, you are hiding the information. They can provide harsh penalties and could make life difficult for some time if you forget to claim the account, or if you are really hiding the information in order to reduce the amount that you have to pay in income taxes that year. If you have a foreign account, it is important to talk to your tax professional right away to ensure that you are claiming it the right way each year.
When to Claim
Understanding when it is time to claim can be a challenge. If you just have a small amount of money in your account, it is not a big deal and the IRS is not going to require you to fill out this information on the tax return. They are more worried about the big amounts that are getting hidden from them by people who would like to save some money or not pay taxes.
If at any time of the year your account gets to $10,000 or more, you will need to claim it on your tax return. This can get tricky. This means that if your account gets up to this point at all, even if it is just once in June and then it is down by the end of the year, you will still need to claim it on the tax return.
Sometimes it is difficult to figure out when you would need to claim your foreign accounts. If you are unsure about how this is going to work or whether you need to claim, make sure that you bring in all of your account papers to your tax professional in order to get this done right.
Penalties of Not Claiming
The penalties of not claiming your foreign bank account on your tax return can be pretty high. The IRS is going to assume that since you did not claim the money from this account on your tax return that you were indeed trying to hide that money. Whether that is true or not doesn’t matter.
The penalties of missing out on your tax return with this foreign account can be severe. Not only are you going to have to pay back all the taxes that you are missing out from the previous years. Plus all of the interest and fees are going to be added since the tax bill is effectively late from the moment that the IRS finds out about your foreign account.
But this is not where things are going to stop. The IRS is able to penalize you and give you fines for hiding this money. For many people, it can end up being more than half the money that was in the account. Rather than just paying a small amount in taxes right in the beginning like you should, you are going to end up paying most of the money in the account because the IRS is able to penalize you. If you are facing the penalties from not claiming your foreign accounts, you should consider working with a tax professional to take control of the issue.
Catching Up on Past Years
Over the past few years, some of the rules of foreign accounts have changed. Many taxpayers may not be aware of these changes, especially if they are not working with a tax professional. Even if you did not know about claiming the foreign accounts, it does not mean you are in the clear. But the IRS will offer a bit of leniency to some people in the hopes of having them come forward rather than putting the IRS to work.
The trick with this is to report the account before the IRS finds you. If you are able to report the account ahead of time, even if it wasn’t reported originally, the IRS will waive some of the fees and you will just need to pay the normal taxes on the money. On the other hand, if the IRS finds out about the foreign bank account and you were not in the process of claiming it with them, all of the penalties discussed above are going to be yours to deal with. It is always better to claim the account as soon as possible because the IRS can be pretty harsh if they feel you are hiding money from them.
Hiring a tax professional is one of the best things that you can do for your business. It ensures that you are claiming everything that you are supposed to, even those foreign bank accounts, so you can avoid trouble with the IRS. When you are ready to get started on your tax return, make sure to contact your tax professional today.
Patrick O'Hara, EA