How to Avoid a 6-Figure Tax Penalty on Foreign Bank Accounts
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Whether you’re an expat or based in the US, you may need to report your foreign accounts to the US Treasury Department by April 15 or face costly tax penalties.
The Anti-Money Laundering Bank Secrecy Act of 1970 requires Americans with overseas assets to disclose their assets via a Foreign Bank and Financial Accounts Report, or FBARif the combined value exceeds $10,000 at any time during the year, whether or not it produced income.
While most Americans know how to file their taxes, FBAR can be easy to overlook, said Eric Bronnenkant, certified financial planner and CPA at Betterment, a digital investment adviser.
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“You can’t file that using commercial tax software,” Bronnenkant said. Instead, account holders must file the FBAR digitally through the Financial Crimes Enforcement Network. Report 114.
A big difference between regular taxes and FBAR is that you report each account’s maximum balance at any time during the year instead of the year-end total, he explained.
For example, suppose you have a foreign bank account with a balance of $5,000 for most of the year. If the amount increases to $100,000 for one day, you will report $100,000 on FBAR, he said. But you do not pay taxes on this amount.
Another point of confusion is which accounts to disclose on FBAR, which can include bank accounts, brokerage houses or even trusts, according to Jude Boudreaux, CFP and partner at the Planning Center of New Orleans.
You may not realize you have to report accounts if you have “a financial interest” or “signing authority,” he said.
If you oversee the accounts of retired relatives in Italy, for example, you may need to disclose them, Boudreaux said. “The definitions are really broad in terms of what needs to be declared.”
If you don’t file the FBAR when required, the penalties may depend on whether it’s considered a “willful” or “unwilling” violation, Boudreaux said.
While the maximum charge for an error is $12,921, a willful violation can result in a whopping penalty of $129,210 or 50% of the amount you failed to disclose, whichever is greater.
That means if you didn’t voluntarily declare $1 million in a foreign account, you might have to pay a $500,000 fee, he explained.
“It’s one of the biggest hammers in code,” he said. “Sanctions aggressively and actively encourage compliance.”
And in extreme cases, there are criminal penalties that can include jail time, Bronnenkant said.
“At the end of the day, disclosure is your friend,” Boudreaux added.