Holding a Foreign Bank Account as a US Expat: What You Need to Know

Holding a Foreign Bank Account as a US Expat

Moving to a new country (though rewarding!) comes with many challenges. 

Beyond finding a new place to live, the move may involve adapting to a new culture, building a new social or professional network, and in some instances, opening a foreign bank account to manage your finances while abroad. 

Opening a foreign bank account isn’t a straightforward process for US expats, however. And depending on the amount of assets you hold in your foreign accounts, you may have to declare them to the US Treasury each year. 

Today’s article hopes to shed some light on these requirements! Here’s what you’ll learn:

  • Why do US expats face challenges when opening a foreign account?
    • What is FACTA? 
  • So you already have a foreign bank account… What is the FBAR, and who needs to file
    • What does the IRS consider to be foreign accounts
    • What are the penalties for not filing the FBAR? 
    • And perhaps most importantly… What do I do if I’ve never filed an FBAR before? 

Why do US expats face challenges when opening a foreign account?

To begin, all US expats must declare their worldwide income and (sometimes) foreign accounts to the IRS regardless of where they live. This is because the US is one of the few countries in the world (alongside Eritrea) that applies citizenship-based taxation.

Citizenship-based taxation is nothing new. In fact, it dates back to the Civil War. It’s the tax model under which people have to pay (or report) their income as a result of their citizenship with a country – regardless of whether they reside there. 

The interesting thing is that for many years, the IRS had no accurate way of tracking the financial activities of American expats. 

All of that changed, however, in 2010 with the introduction of the Foreign Account Tax Compliance Act (in other words, FATCA). 

What is FATCA? 

As someone who lives abroad, you may think to yourself, what’s the point of filing a return? How will the IRS know that I live overseas anyway?

Compliance became especially important when Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. Under this Act, international banks in every country worldwide are now obligated to report the financial activities of their US clients to the IRS. 

One unintended consequence of this change, however, is that foreign financial institutions have become hesitant to accept American clients. Instead, some turn Americans away in an effort to avoid these additional reporting requirements. 

So you already have a foreign bank account… Who needs to file the FBAR 

The Report of Foreign Bank and Financial Accounts (FBAR) is a document you may need to file (using FinCen Form 114) to declare open accounts you hold overseas. The goal of the FBAR is to fight tax evasion and to take a measure of the maximum balances US expats hold in foreign accounts. 

The IRS specifies that if you meet the following criteria, you must file an FBAR:

  • You hold at least one foreign account overseas that you have a financial interest in or signature authority over. 
  • You hold $10,000 or more across your foreign accounts combined

Let’s break these down a bit further. 

The IRS determines financial interest based on who’s the owner of a record or legal title. On the other hand, a person with signature authority controls the disbursement of money or other property in the account using their signature. 

The deadline for filing the FBAR is on April 15th of each year. However, those who fail to file by the deadline receive an automatic extension to October 15th when filing Form 114. 

What does the IRS consider to be foreign accounts? 

Here are a few examples of accounts (outside the US) that the IRS classifies as foreign accounts:

  • Bank accounts
  • Foreign investment funds
  • Retirement accounts

That being said, you don’t have to declare your foreign accounts if they fall into the following categories:

  • Accounts owned by a governmental entity or international financial institution
  • Accounts maintained in a US military banking facility
  • Accounts held in an individual retirement account (IRA) in which you’re an owner or beneficiary  

What are the penalties for not filing the FBAR? 

The penalties for not filing the FBAR when you’re required to do so will depend on a few factors. Whether you willfully or non-willfully avoided filing will have a big influence. If you avoided filing the FBAR willfully, then the penalty will be much higher.

The penalty for non-willful non-compliance starts at $10,000 for each missed tax year. Willful non-compliance will come at a heftier price, sometimes up to hundreds of thousands of dollars: the IRS may charge you $100,000 or 50% of the balance in your foreign account. 

The amount of funds in your foreign account will also impact potential penalties. Just reaching the $10,000 threshold for filing versus holding tens of millions of dollars in unreported foreign accounts will impact the penalties the US Treasury may assess. 

Read More: Understanding FBAR Penalties

What do I do if I’ve never filed an FBAR before? 

Now, let’s say that you’re an expat who’s been living overseas for quite some time, and you hold more than $10,000 across several foreign bank accounts. If the first time you learned about your FBAR tax obligations is right now, the penalties we just described likely feel like an overwhelming possibility. 

However, let’s say it’s been years since you left the US, and the IRS hasn’t contacted you yet. Does that mean that you’re still likely to run into financial trouble? No, it does not, as the IRS offers a few ways of getting back up to speed with your filing obligations with a reduced (or no) risk of a penalty. 

To get started with the Delinquent FBAR Procedure, you need to file a statement that explains why you’re filing the FBAR late. As you file the form electronically, you’ll have to select a reason for filing late on the cover page of the form.

On the other hand, for those who have missed both tax returns and FBAR filing, the IRS has a Streamlined Filing Compliance Procedures program that allows US expats who live outside of the US to catch up without penalties. To qualify for the Streamlined Filing Compliance Procedures, you’ll need to:

  • File your last 3 federal tax returns
  • File your last 6 FBARs 
  • Pay any taxes & related interest you have due
  • Certify that your noncompliance was non-willful

Don’t Forget About Your US Tax Obligations While Overseas

It’s one thing to familiarize yourself with all the rules and regulations to remain IRS compliant. But if you feel like understanding and filing all the necessary paperwork is more trouble than it’s worth, or you’d like to be sure you’re doing things right the first time, you might consider seeking the help of a US tax advisor to eliminate stress and focus instead on things that are more important to you.

Insight meets inbox

Quarterly insights and articles directly to your email inbox. Our newsletter offers substance (over spam). We promise.