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Americans that have bank accounts outside the shores of the country or possess assets in financial institutions outside the country may wonder what the American tax law has to say about that. They may want to know if the American tax law is in line with the foreign tax law to prevent cases of double taxation.

It is important to know that the way the IRS handles the money in an American bank account is different from the way it handles the money stored up in foreign banks.

The reality on the ground remains that the American tax law doesn’t fancy American citizens having accounts outside the shores of the country. They want every money owned by Americans to be operated within the shores of the country. Why is this so? IRS feels that the foreign tax law of the country where the offshore account is will have more control over the money than they would. The summary of everything is that the IRS hates the fact that they won’t be able to take money out of the account since it is outside their jurisdiction. This is why they discourage such.

Apart from that, a lot of foreign banks shy away from taking deposits from American citizens these days. One would think that the home of traditional offshore accounts like UK and Switzerland would want to operate offshore accounts for Americans, but they shy away from it, in a lot of cases.

The reason for avoiding Americans is because the Department of Justice- DOJ- and IRS are increasingly aggressive in the way they handle Americans’ foreign accounts. The interference by IRS and DOJ have made Americans have access to only a few foreign banks that are interested in spending a lot of energy and time in handling them. These foreign banks that assent to this are ready to face both the foreign tax law, as well as the American tax law. They have the needed kind of

compliance department that can easily tackle the advanced regulations, as well as great amount of scrutiny, placed by the US on foreign accounts owned by its citizens.

As an American that wants to open a foreign bank account, it is important that you don’t ignore the challenges that you may face, and try your best to do it using the tax law. You will be needed to clear up whatever credit concerns that may come up, as well as other risk flags.

The fact that one is an American may make any bank outside the shores of the country shrug in terror. This means that you should try and appear as an abiding American citizen as an individual when you approach a foreign bank.

General Thoughts On The American Tax Laws and Regulations

It is important to know that if you are an American citizen with a foreign bank account, and it has over ten thousand dollars, you are expected to disclose this to both the US Treasury and IRS. You will file both FinCEN Form 114 and Income tax returns.

Foreign banks that hold American citizens’ accounts are expected to file with the IRS, account names, numbers, addresses, balances, as well as identification numbers, according to the FATCA- The Foreign Account Tax Compliance Act.

The United States government is capable of bringing up both criminal and civil charges against those Americans and foreign financial institutions that refuse to declare these foreign accounts owned by Americans to the IRS or refuse to make the needed tax payment on those foreign account assets.

IRS: Its Double taxation of US Expatriates

A lot of countries are known to prevent double taxation of their citizens. They do not tax what their citizens make exclusively outside the shores of their country. The same can’t be said for the American tax law. IRS doesn’t care if the foreign tax law has taxed you on what was made outside the shores of the US, you will still be taxed on that income. 

The US government is known to levy a tax on the income earned outside the country, as long as it is earned by an American. The United States is seen as the sole developed country that practices double taxation of its citizens. Other countries that do this aren’t developed and carry out such actions because they may not have the needed database or tax strategy.

Let’s make an illustration.

If an American expatriate stays in Austria and pays the tax to the Austrian government, the United States government will ask for its too. The latter doesn’t care that the former has collected its tax, neither do they care that the income was made exclusively in Austria.

If that American creates an account with an Austrian bank, the US government will be given access to the account and take away its taxes.

Some reliefs are given to Americans that pay taxes outside the shores of the country like a partial credit for foreign taxes paid on overseas income. Usually, the relief provisions are little.

Not every foreign account held by an American came about through economic activities outside the shores of the country, meaning that they don’t have to disturb themselves about double taxation. This doesn’t mean that you shouldn’t file your returns with IRS.

FinCEN form 114

The fact that foreign accounts must be taxed by the US government, not the US Treasury and IRS have put in place action to ensure that citizens declare their overseas financial assets.

Every American that has more than ten thousand dollars in any or all of his account(s) must make a declaration to the Treasury Department immediately.

Apart from declaring, they are expected to pay tax on every income that comes into that account unless they are “signature authority accounts.”

Before June 3013, this was usually done by making use of the paper-based FBAR, but things have changed now, as they aren’t allowed.

Every United States taxpayer that has an offshore bank account with more than ten thousand dollars is expected to file a FinCEN Form 114- Financial Crimes Enforcement Network Form 114.

This is done electronically.

 FinCEN 114 is also called FBAR, but the new kind. It is important not to think that the new FBAR replaced the income tax filing. Far from it, it is only a different document that has to be submitted separately. During its introduction, taxpayers were given a period until June 30, 2014, to have the brand new form filed, or be given a penalty of over fifty percent of their assets.

With the introduction of FATCA- The Foreign Account Tax Compliance Act

Congress passed the Foreign Account Tax Compliance Act, the US government became the first one to successfully have tremendous effects on banks all over the world.

FATCA demands that every foreign bank with an American account that has over fifty thousand dollars should report this to the US government. If they refuse, they have to deal with thirty percent withholding penalties, as well as the chance that they would be excluded from the U.S. markets. FATCA was passed in 2010 but became effective in 2014. By 2015, a lot of foreign institutions were ready to give the needed information to the IRS, including China and Russia.