Opening Foreign Bank Accounts Tax Implications
Contents
- 1 Opening Foreign Bank Account Tax Implications
- 2 First, Reporting vs Income
- 3 No Tax Implication from the Foreign Account
- 4 Tax Implication of Using a Foreign Account
- 5 Reporting Requirements
- 6 FBAR (FinCEN Form 114)
- 7 Form 8938 (FATCA)
- 8 Form 8621
- 9 Form 3520
- 10 Form 3520-A
- 11 Late-Filing Disclosure Options
- 12 Streamlined Filing Compliance Procedures (SFCP, Non-Willful)
- 13 Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)
- 14 Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)
- 15 Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)
- 16 Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)
- 17 IRS Voluntary Disclosure Procedures (VDP, Willful)
- 18 Quiet Disclosure
- 19 Late Filing Penalties May be Reduced or Avoided
- 20 Current Year vs. Prior Year Non-Compliance
- 21 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 22 Need Help Finding an Experienced Offshore Tax Attorney?
- 23 Golding & Golding: About Our International Tax Law Firm
Opening Foreign Bank Account Tax Implications
With the globalization of the U.S. economy, it is not uncommon for U.S. taxpayers to operate a business or maintain investments in several different countries. To manage and maintain investments and assets overseas, taxpayers often have to open foreign bank accounts to receive or make transfers, deposits, and withdrawals. A taxpayer may ultimately have multiple different bank accounts in different countries — which can lead to various international information reporting requirements and potential tax implications. Noting, that merely opening a foreign bank account does not lead to a tax implication. But, if the taxpayer is generating income from that foreign account (or with the foreign account), then the taxpayer may have a U.S. tax implication even if there is no tax implication overseas this can get very complicated for taxpayers when they have foreign bank accounts in several different countries in which the different countries treat income associated with passive income such as interest or dividends differently from one another. Let’s look at some common examples: *This article was originally published in 2020 by Golding & Golding and it has been updated and expanded. **For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.First, Reporting vs Income
One of the first key issues to keep in mind is that there are typically two issues when dealing with opening foreign bank accounts. The first issue is the reporting requirement, which typically includes U.S. taxpayers having to report forms such as the FBAR and Form 8938 and the second issue is whether there are any taxes due on the income.No Tax Implication from the Foreign Account
Let’s look at a few common situations in which opening a foreign bank account does not lead to any tax implications:-
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Example: Nancy is a U.S. citizen who decided to transfer a large amount of her savings into a foreign bank account that she recently opened because she wants to purchase a property overseas. Since Nancy transferred her own after-tax dollars to an account overseas, there is no tax implication to opening the foreign account.
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Example: Ned is a U.S. citizen who is going to move overseas for a new career. He opens a foreign bank account, but the bank account does not generate any interest because it is a non interest bearing account. Since now transferred after tax dollars overseas into the foreign account and there is no income being generated in the account there is no tax implication to opening the foreign account.
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Tax Implication of Using a Foreign Account
Sometimes opening a foreign bank account can lead to tax implications for the U.S. taxpayer on their U.S. tax return. Let’s look at a few examples of when opening a foreign bank account can lead to some tax implications:-
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Example: Janine is a lawful permanent resident who opened a foreign bank account overseas because she is going to be receiving income from a foreign job in which he is working as a consultant. Opening the foreign bank account does not have any tax implication. But the money she earns from foreign sources is deposited into the foreign account and that income is still taxable. In other words, Janine must include this foreign income that is deposited into her foreign account on her U.S. tax return. This is true, even though the income is foreign-sourced and it was all deposited into a foreign account.
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Example: Jeffrey is a lawful permanent resident who recently opened a foreign bank account because he received a large inheritance from overseas. The foreign bank account has a high interest rate, so Jeffrey is earning a significant amount of foreign interest income. The foreign interest income is not taxable in the foreign country, but since Jeffrey is a U.S. person for tax purposes the interest generated from the foreign bank account that he opened does have a U.S. tax implication and he’s required to include this information on his US tax return.
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Reporting Requirements
Owning a foreign bank account may require the reporting of the foreign account on many different international information reporting forms. Here are a few examples of how foreign bank accounts are reported for U.S. disclosure purposes on forms such as the FBAR and Form 8938:FBAR (FinCEN Form 114)
Many situations will warrant a Taxpayer having to file the FBAR to report their foreign bank accounts, investment accounts, pensions, and/or other accounts.-
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Example: David has 15 foreign accounts for a total value of $180,000. 12 of the accounts are active and three of the accounts are dormant, with less than a few dollars in each of them. All 15 accounts are reportable on the FBAR.
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Example: Scott has 27 different mutual funds worth $700,000, but they are all located in a single account under one account number. For purposes of the FBAR, Scott will report the main account number and the total value of all the assets under that account — but for purposes of IRS Form 8621, Scott will report each fund separately.
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Example: Brian has a foreign pension plan through his prior employer when he lived abroad. He has not made any contributions to the plan in several years (since becoming a U.S. person) and has not yet received any distributions from the pension plan either. The pension plan is still reportable on the FBAR.
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Example: Dianne has seven accounts, but it is the same $200,000 transferred into a new different account every six to eight weeks (in order to take advantage of increasing interest rates). Even though it is the same $200,000 that was transferred to different accounts throughout the year, Dianne must report all seven accounts on the FBAR. That is because the FBAR is not used to report the total amount of money the Taxpayer has, but rather to report the maximum value of each of the different accounts throughout the year.
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Example: Dustin has 31 accounts of which he is the owner of and has no signature authority accounts. Dustin must identify on the FBAR that he has more than 25 accounts and prepare the supplemental FBAR form for his records.
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Form 8938 (FATCA)
Form 8938 is filed by U.S. persons who are required to file a tax return in the year that the Form 8938 threshold requirement is met. For purposes of these examples, we are focused on individuals — but entities may have to file Form 8938 as well.-
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Example: Scott is a U.S. citizen who lives in the United States and has $175,000 in foreign bank accounts. He is required to file a tax return in the current year and therefore may have to file Form 8938 as well.
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Example: Michelle is a lawful permanent resident who lives overseas and has not made any treaty elections. She has $700,000 in foreign investment accounts. Even though she lives and works overseas — and the accounts are tax compliant overseas — since she is still required to file a U.S. tax return, she may have to file Form 8938.
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Example: Dean is a lawful permanent resident who lives in a foreign country but made a treaty election to be treated as a non-resident alien (NRA) for tax purposes. Since he is not considered a U.S. person for tax purposes, he is not required to file a Form 1040 and therefore he may not be required to file a Form 8938. (He may or may not be required to file the FBAR based on the recent court case of Aroeste).
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Form 8621
When it comes to PFIC, one component of filing with the IRS is to report the existence of the account while the other aspect is dealing with the tax implications — the latter which is impacted by whether any elections have been made and if there are any excess distributions.-
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Example: David invested in various foreign mutual funds that are all contained within one single account at a Foreign Financial Institution. The only assets in the investment account are mutual funds and the total value of the funds are $170,000. For FBAR purposes, David will report the single account, but for PFIC/Form 8621 purposes David will report each fund individually.
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Example: Michelle invests in different ETFs but does not hold the funds in a single account – rather, she owns each fund individually. The total value of the funds is $650,000. Michelle will have to file the FBAR to report each fund individually as well as having to report each fund separately on Form 8621.
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Example: Peter owns two mutual funds (not in an account) with a combined value of $19,000 and no distributions from the funds. Peter must file the FBAR to report the mutual funds, but is only required to do very limited reporting on Form 8621 because he files as ‘Single’ and is below the $25,000 exception. Noting, there is contradiction between what the regulation requires and what the instructions require for this Form 8621 exception — with many Taxpayers choosing to err on the side of caution by filing the Form 8621 just to complete the very top portion of the form for each fund.
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Form 3520
One of the most common scenarios involves when a U.S. person receives a gift or inheritance from a non-resident alien (NRA) that exceeds the threshold for filing:-
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Example: Dana is a U.S. Citizen but the rest of her family are non-resident aliens who live abroad. Her aunt is very proud that Dana graduated college and gifted her $400,000 to help her purchase a new home. Dana may have to file Form 3520.
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Example: Devin is a Lawful Permanent Resident who currently attends school in the United States. Devin’s grandma is a non-resident alien who wants to help Devin with expenses — and gifted him $200,000 to help him supplement his expenses. Even if Devin does not use all the money for expenses, his grandma made it clear that the full amount is a gift to Devin. Devin may have to file Form 3520.
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Example: Denise’s mom is a non-resident alien who wants to gift Denise and her sister each 15% in a foreign business. The value of the shares that Denise receives are $500,000. Even though Denise did not receive money, and the business is located outside of the United States, she may have to file Form 3520.
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Example: Brenda is a Lawful Permanent Resident who lives in the United States and recently received a $600,000 inheritance from her foreign mother who passed away. The inheritance is comprised of foreign property and assets and have not been transferred to the U.S. Even though no money or assets have been transferred to the United States, Brenda may still have to file Form 3520.
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Example: Bill is a U.S. Citizen who received a $3,000,000 inheritance when his foreign father passed away. While it is a large sum of money and Bill is not required to pay any taxes on the inheritance, he may have to file Form 3520.
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Form 3520-A
When a Taxpayer has ownership of a foreign trust, they may be required to file form 3520 and form 3520-A. The reporting requirements for ownership of a foreign trust are typically more complicated than when a taxpayer files a Form 3520 to report the receipt of a gift or distribution.-
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Example: Denise is a U.S. Citizen who has non-resident alien family members living abroad. Her sisters — who are all non-resident aliens — decided to form a foreign trust and wanted to include Denise as one of the owners. Now that Denise is an owner of the foreign trust, she may be required to report her ownership on form 3520 and 3520-A.
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Example: Daniel is a Lawful Permanent Resident who recently became a U.S. person in the current year. Now that Daniel is a Lawful Permanent Resident and a U.S. person for tax purposes, his ownership in his foreign trust is now reportable on Form 3520 and 3520-A (U.S. owner of a foreign trust). In other words, even though the only action Daniel took was to become a U.S. person, his previous ownership in a foreign trust that he owned before becoming U.S. person is now reportable.
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