How to Avoid a 6 Figure Tax Penalty on Foreign Bank Accounts

Whether you’re an expat or a US resident, you may need to report your offshore accounts to the US Department of the Treasury by April 15, or face costly tax penalties.

The Bank Secrecy Anti-Money Laundering Act of 1970 requires Americans with assets abroad to disclose their holdings through a Report of Foreign Bank and Financial Accounts, or FBARif the combined value exceeds $10,000 at any time during the year, regardless of whether it produced income. яндекс

While most Americans know how to file taxes, the FBAR can be easy to miss, said Eric Bronnenkant, a certified financial planner and CPA at Betterment, a digital investment adviser.

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“You can’t file this using commercial tax software,” Bronnenkant said. Instead, account owners must file the FBAR digitally through the Financial Crimes Enforcement Network. Report 114.

One big difference between regular taxes and the FBAR is that it reports the maximum balance for each account during any time of the year instead of the total at the end of the year, he explained.

For example, let’s say you had a foreign bank account with a balance of $5,000 for most of the year. If the amount jumped to $100,000 for one day, you’d report $100,000 on the FBAR, he said. But you don’t pay taxes on that amount.

Another point of confusion is which accounts to disclose on the FBAR, which can include bank accounts, brokerage houses or even trusts, according to Jude Boudreaux, CFP and partner at The Planning Center in New Orleans.

You may not realize you need to report accounts if you have “a financial interest” or “signing authority,” he said.

If you’re monitoring the accounts of retired parents in Italy, for example, you may need to disclose them, Boudreaux said. “The definitions are really broad as to what needs to be reported.”

If you don’t file the FBAR when required, penalties may depend on whether it’s considered an “intentional” or “unintentional” violation, Boudreaux said.

While the maximum fee for an error is $12,921, a willful violation can result in a whopping fine of $129,210 or 50% of the amount you failed to disclose, whichever is greater.

That means if you intentionally underreported $1 million in a foreign account, you may have to pay a $500,000 fee, he explained.

“It’s one of the biggest hammers in the code,” he said. “Sanctions aggressively and actively encourage compliance.”

And in extreme cases, there are criminal penalties that can include jail time, Bronnenkant said.

“Ultimately, disclosure is your friend,” Boudreaux added.