Overseas accounts are one of the best ways that you can save some money and earn a better rate of return while they are in the account. American banks are known for having low interest rates for those who invest in the accounts and your money is barely making anything just sitting there. Many foreign banks will offer some incentive for Americans to put money into their banks in order to help the business run. And it is perfectly fine to put money into these accounts, as long as you claim them on your taxes when you’re supposed to.
There are some people who like to use these foreign accounts as ways to hide some of their money and earnings from the IRS. Foreign banks are hard to track down and unless the IRS is actively looking for that bank account, something they can’t necessarily do with millions of people each year, they will never know about it. Some taxpayers use this to their advantage, putting away lots of money so they don’t have to claim it on their tax returns at the end of the year.
This is a practice that could get you into a lot of trouble. If the IRS finds out that you didn’t claim this money and you are using the account to hide your earnings, you could be in a lot of trouble when they find out. It may take a bit before the IRS finds out about the account, or it could take just one year, but whenever they do find out, you will have to deal with the harsh consequences of that action. It is always best to claim your foreign bank accounts early on to avoid any other issues. Your tax professional will be able to outline some of the rules of foreign bank accounts with you to help avoid some of these issues.
Claiming Amounts
When it comes to your overseas accounts, you need to make sure that you are claiming at the right time. There are some times when you will not need to claim at all. The IRS does not want to fill up its offices with lots of paperwork for foreign accounts with just a little bit of money in them. If you have an account that has only $500, it is not likely you are hiding this money from the IRS and they don’t want to know all that much about it. On the other hand, if your foreign account has $100,000 in it, you may be more likely to hide that information in order to reduce your taxes.
In order to claim the money on your tax return, you need to have at least $10,000 in the account. If your account reaches this amount at any point during the year, even if it reaches this point for just a day, you need to claim the account for the whole year. It does not matter what the opening or closing balance of the account may be; if the account gets to $10,000 or above, you need to claim the whole year.
Keeping good records is critical to helping you to do this claiming and ensures that you are not missing out on times when you should be claiming. Make sure to bring these records in to your tax professional to ensure that you are making the right claims when you should.
Not Claiming the Foreign Account
If you claim your foreign account, you will have to pay a bit in taxes on the money and then the situation is all done. But if you try to hide this account in the hopes of avoiding some taxes, you are going to be in big trouble. The IRS will find out. Whether they start to notice some red flags between your spending and how much income you claim or someone calls in and tells on you, the IRS always finds out eventually. And when they do, they are going to be able to put some hefty fees on you.
Not only can the IRS charge you the taxes and interest that you are delayed on all the years that you didn’t make the payments, they can also go through and add some extra fees. You could end up paying more than half of the amount in the account into taxes and fees for keeping this a secret. It is much better to just tell about the amount and claim in the year that it occurs to avoid these issues.
There are some exceptions based on whether or not you knew about these changes in the rules. If you forgot or didn’t know about claiming in a year and are able to make the claims before the IRS finds out about the account, you can get an exception and won’t be in trouble. This is to encourage those who have foreign accounts to come forward even if they may be delinquent on the amount. Make sure to work with your tax professional to get this done right.
Working with a tax professional is one of the best ways to ensure that your taxes are getting done right the first time. Contact our offices right away if you need help with claiming your foreign bank accounts to ensure that you are getting this information put into the tax return properly.
James Wells EA MBA Tax Office