“Every day is a bank account, and time is our currency. No one is rich, no one is poor, we’ve got 24 hours each.”
I recently watched “The Infiltrator,” starring Bryan Cranston. It’s the true story of a customs agent who, in the 1980s, went deep undercover to bust drug dealers and their international bankrollers.
I highly recommend it.
It was a great film, and it reminded me of some matters on which I’ve advised — foreign bank accounts (not drugs). Let’s review some basic information and protocols about how business owners, private companies and individuals with foreign accounts can avoid penalties imposed by the U.S. government.
The FBAR and the FinCEN Report
Any U.S. citizen with a foreign bank account or accounts holding more than $10,000 must file what was once known as a foreign bank account reporting form, or an “FBAR.” The FBAR is still around but now goes by the more boring-sounding FinCEN Report 114, which is short for Financial Crimes Enforcement Network.
Maybe the feds changed the name of the form to intimidate us — I honestly don’t know the reason for the change. But when you complete your form, you’ll submit it to the Department of Justice and to the U.S. Department of the Treasury or IRS. This is one of those rules where everyone rats — um, er, I mean reports to everyone else.
Reporting the existence of the accounts is key. You’re not instantly taxed on having an off-shore account. You won’t pay taxes on the amounts, per se, just on the dividends and interest.
Why Keep A Foreign Account?
There are various reasons someone may have and keep foreign bank accounts. Here are a few we commonly encounter:
- Avoiding an exchange rate. If your business regularly engages with international companies, not converting from another currency to the dollar could be a cost-saving measure.
- Individual clients often inherit foreign accounts. This can also include unique circumstances, like Holocaust reparations. Some people maintain accounts or real estate in situations like these, while others I’ve managed keep them out of habit with no intention of using them. We have helped these folks employ legal and ethical methods to close and liquidate these holdings while avoiding certain fees.
- “Just because.” Some people, like frequent travelers, freelancers or solopreneurs, keep the accounts because of the nature of their work or lifestyle.
Keeping It Close To Home
Regardless of the reason, you must have a foreign account, one way to minimize fees and headaches is to opening a U.S.-based account with an international bank. This saves you the hassle of opening a foreign one, since these banks typically have the ability to offer dollar-denominational accounts no matter what country you’re in. This way, you’re spending and making the money in your home country, which I believe is the most efficient way of handling your individual or small business matters.
When Opening Any Foreign Account
Whether you open a foreign or an international, dollar-based account, tell your tax adviser. Communicate by email so that you have a record of doing so. An email to your adviser, saying, “Hey Joshua, I opened an account in Brazil with $11,000 in it,” starts the dialogue and helps avoid the absurd penalties.
The government has been known to tax up to 150% of the account’s peak holdings if they uncover it. I’ve worked with clients who’ve been in this scenario, and it’s extremely unpleasant.
The Paperwork
Preventing the penalties is simple, which is probably why it’s often overlooked by individuals and businesses. Visiting the IRS web site can get you on your way with forms like the ones below:
IRS Form 8938, Statement of Specified Foreign Financial Assets.
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
Don’t want to think about it? We’re happy to handle it for you. Contact Brinen & Associates to help you open, close or claim your overseas bank account.