What To Do With Your Foreign Bank Account
For many years, many Americans used foreign bank accounts to hide money from the IRS without fear. In an effort to crack down on this problem and ensure that American citizens pay all required taxes on their income, the IRS has recently begun suing various foreign banks and basically attempting to eliminate the offshore banking secrecy protections that have long been in place.
These efforts have led to dramatic changes that affect all Americans with bank accounts in foreign countries. Whereas your money may have been safely hidden in years past, the IRS now requires all foreign banks to provide reports on all American-owned accounts. Furthermore, it is now considered a crime to fail to report any foreign accounts and foreign income. Almost all foreign banks are now cooperating with the IRS and automatically turning over all information about American-owned bank accounts.
What to Do If You Have a Foreign Bank Account?
The legal actions the IRS has taken against numerous foreign banks have completely eroded most banking privacy rules, which means that anyone who has not reported should be worried. This not only includes those with personal offshore accounts, but also any company-held accounts or trusts. American citizens are required to disclose the existence of any and all foreign bank accounts. This disclosure can be made on your 1040 tax return form or by filing the Report of Foreign Bank and Financial Account form. Should you fail to disclose any foreign accounts and the IRS learns of them, you will likely be facing severe penalties and fines.
In addition to reporting the existence of any foreign accounts, Americans are also required to report and pay taxes on any foreign income. As with not reporting the account, failure to pay the appropriate taxes on foreign income carries with it the risk of serious criminal consequences and large fines that could result in wage garnishment. In most cases, an individual will be found guilty of both failing to report the account and failing to report and pay taxes on the foreign income in that account. When this is the case, the person is usually looking at extremely steep civil and criminal consequences, which can potentially include jail time.
Options for Americans with Undisclosed Foreign Accounts
1. Quiet Disclosure
One possible option is known as Quiet Disclosure, which essentially involves amending your past tax returns and paying back taxes on all income in your foreign accounts. Unfortunately, the IRS has already announced that this method won't allow you to avoid all penalties. Although you will be taking care of paying any necessary taxes you owed, you will still usually face civil and criminal consequences as a result of your previous failure to disclose the account.
2. Voluntary Disclosure
Voluntary disclosure basically means that you choose to fully disclose all foreign accounts and income before the IRS learns of them. This is generally the best possible option, and the IRS is encouraging Americans to use this method by offering reduced fines, lower penalties and a promise not to file criminal charges against anyone who voluntarily discloses their accounts.
Of course, it is essential that you seek legal counsel prior to taking this step in order to give yourself a better chance of negotiating a favorable settlement. While you will still have to pay some fines with voluntary disclosure, these are nothing compared to what you'll be facing should the IRS discover your accounts before you disclose them.
Just because you disclose your accounts doesn't mean you will be forced to close them. In fact, you can also get legal counsel to assist you in making sure your foreign accounts are tax compliant to ensure you fully avoid future problems and potential wage garnishment.
The huge change in banking secrecy rules means that every American with a foreign bank account needs to take immediate action to bring it into line with IRS regulations. If you are already doing this then you have nothing to worry about. But if you haven’t spoken with a tax lawyer about your foreign account now is the time to do so. You don’t want to be accused of failing to report income because you weren’t completely aware of the laws. Fortunately Mary King can help. She’s an experienced tax attorney who has helped thousands of clients deal with the IRS and get their taxes in order.
Have problems with your foreign account or just need to learn more about how to report it to the IRS? Use the form below to schedule a free consultation with Mary today.