Do Overseas Banks Report US Expat Bank Accounts to the IRS

Do Foreign Banks Report Accounts Owned by Americans to the IRS?

Do Foreign Banks Report Accounts Owned by Americans 

In recent years, the Internal Revenue Service has significantly increased the enforcement of foreign accounts compliance. Each year, taxpayers who have an ownership or interest in various overseas accounts, assets, investments, and income are required to report the information on various international information reporting forms. Some of the more common forms are the FBAR, Form 8938, Form 3520/3520-A, and Form 5471. Most of these forms have an annual reporting requirement and it is not uncommon for taxpayers to have either not been aware of the reporting — or have been aware but either never filed the form or filed it late. While there are various types of foreign assets that the IRS can go after, these five assets listed below tend to be some of the most common.

Foreign Bank Accounts

Foreign bank accounts are at a higher risk of audit and penalties because hundreds of thousands of foreign financial institutions report US persons to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). This may lead to the IRS either issuing a soft letter, scheduling the taxpayer for audit, or issuing penalties.

Investment Accounts and PFIC

Similar to foreign bank accounts, many foreign investment accounts held at financial institutions are reported to the IRS as well, such as stock accounts, mutual fund accounts, and hybrid accounts. This is further complicated by the fact that financial institutions across the globe have entered into deferred prosecution agreements and other types of agreements with the U.S. government. As a result, many of these foreign financial institutions will report taxpayers to the IRS throughout the year, usually quarterly or semi-annually.

Foreign Trusts

Over the past several years, the Internal Revenue Service has ramped up enforcement of foreign trust compliance. In fact, the IRS has released several publications involving abusive tax scheme fines and penalties — with many of them focusing on taxpayers who use offshore trusts and other types of trusts to try to sidestep reporting.

Foreign Pension Plans

In 2023, the Internal Revenue Service and the Department of Justice initiated a full court press against taxpayers who they believe are improperly funding Malta pension plans and not paying tax on the growth and distributions. This is just one of the various foreign pension schemes that the IRS is going after in which the US government believes taxpayers are intentionally misinterpreting tax treaties and competent authority arrangements and further increasing the international tax gap.

Foreign Gifts

For taxpayers who have received foreign gifts, the IRS has begun issuing automatically assessed penalties which start at 5% a month, up to 25% value of the gift period since it is not uncommon for taxpayers to only hear about their misreporting several months after the form 3520 was due coming this can oftentimes lead to significantly high foreign gift penalties. What makes this so unjust, is that oftentimes it does not result from any missed income but rather is simply a gift that a U.S. Person receives from a family member overseas.

*Foreign Corporations

While the IRS likes to issue Form 5471 penalties for failing to report foreign corporations, currently based on the US Tax Court ruling in Farhy, the IRS has lost the ability to issue assessable penalties against taxpayers on matters involving Form 5471. Likewise, the Supreme Court is set to hear a case on the Section 965 repatriation tax — which often coincides with Form 5471 reporting and penalties — and thus the IRS is somewhat shackled at this point on issuing penalties for these types of foreign corporation matters.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.