If you are a US citizen or resident and own offshore bank accounts, be aware that your worldwide income is subject to US income tax, and there are informational reporting requirements. There are credits and deductions for income tax paid to foreign jurisdictions, but after any such allowances your foreign income is taxable..
There are several reporting requirements relating to offshore accounts. The penalties for non compliance with any of these requirements are harsh and can even result in a prison sentence. The IRS website lists about a dozen penalties related to offshore account disclosure. They also mention criminal charges for filing a false return and for failure to file a return. If found guilty of these charges, a prison term could be involved. I will outline in this article, 2 penalties that could apply to an individual with a foreign bank account.
Any interest earned on your offshore back account balance is taxable and should be reported on your form 1040. If you filed a return and did not include this income, on discovery, you will be required to pay the tax on the interest earned. You will also have to pay interest on the unpaid tax, and a non-payment penalty. You may also have to pay an accuracy related penalty or a fraud penalty. If you did not file a return, there is also a non filing penalty.
An accuracy related penalty applies if you understated your tax liability by more than $5,000 or 10%, and is generally 20% of your unpaid tax liability. If the non compliance or understatement of taxes is egregious enough, you may be charged a fraud penalty, which is 75% of the under-payment, instead of an accuracy related penalty.
If you have one or more foreign bank account with aggregate balance exceeding $10,000 US dollars in any calendar year, you are required to file form TD F 90-22-1 by June 30th of the following year. Failure to make this filing could cost you $100,000 or 50% of your account balance in penalties.
You may wonder how on earth the IRS is going to find your offshore accounts. In recent years they have been very aggressive about finding undisclosed offshore assets.They sign tax treaties with other countries which give them access to information about offshore bank accounts owned by American citizens and residents. They also offer incentives for whistle blowers to provide this type of information. So it could be your ex best friend, your ex business partner, or your ex spouse who wants to extract revenge for something. It could even be your banker. The bottom line is it is becoming easier for the IRS to find assets hidden overseas.
The IRS has become so aggressive about investigating offshore accounts held by US residents that HSBC has ceased offering wealth management services to US residents abroad. HSBC says that American clients “will be better served by our private banking teams in the United States.” A big international bank such as HSBC is no longer willing to take the risk. Should You?