US taxpayers are required to report their worldwide income and foreign financial assets annually on their tax returns and on international informational reports, such as FinCEN Form 114 (FBAR), Form 8938, etc.
More In Pay
An International Information Reporting Penalty may apply if you have financial activity from foreign sources and you don't follow tax laws, rules, and regulations. We mail you a notice if you owe a penalty and charge monthly interest until you pay the amount in full.
Unfortunately, that same foreign income is not typically exempt in the US — and so if the FFI reports the income to the IRS, but the taxpayer did not include it on their US tax return — it could lead to an audit.
The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report account numbers, balances, names, addresses, and identification numbers of account holders to the IRS.
The answer is yes. If they would actually go through the trouble of tracking you down is another question. But could they absolutely. A US citizen has to file a tax return on their worldwide income even if they live abroad and spend no time in the US.
However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023).
If you meet the requirements and willfully fail to file an FBAR you can be fined up to the greater of $124,588 or 50% of the total balance in all your overseas accounts. If you meet the requirements and fail to file FATCA Form 8938 you can be fined from $10,000 up to $50,000 if you don't act timely.
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The full line item instructions are located at FBAR Line Item Instructions.
Individuals who fail to report their interest in foreign financial accounts run the risk of substantial civil penalties and possibly a criminal investigation by the IRS.
If you send an international wire transfer over $10,000¹, your bank or financial institution is required by law to report it directly to the IRS. Your bank may also ask for additional information, including the following¹: Evidence for the source of the funds.
Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits. The best defense is proper documentation and receipts, tax experts say.
6 years - If you don't report income that you should have reported, and it's more than 25% of the gross income shown on the return, or it's attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts.
Expats can use the Foreign Earned Tax Exclusion (FEIE) to exclude foreign income from US taxation. For the 2023 tax year, the maximum exclusion amount under the FEIE is $120,000. To qualify for the FEIE, you must meet the standards of the physical presence test or the bona fide residence test.
Personal Bank Accounts
If you decide to move back to America after time spent overseas, you may transfer the funds from your foreign bank account to your American bank account. Since this isn't income and is simply moving around your money, you won't have to pay taxes on the transfer.
The source of your earned income is the place where you perform the services for which you receive the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income.
The most significant FBAR audit trigger is failing to meet the deadline. Taxpayers must report financial accounts with a cumulative value exceeding $10,000 at any point in a year. Incorrect FBAR filing can lead to penalties of up to 50% of offshore funds, possibly escalating to criminal charges.
If transactions involve more than $10,000, you are responsible for reporting the transfers to the Internal Revenue Service (IRS). Failing to do so could lead to fines and other legal repercussions.
Yes, it is legal for an American citizen to open a foreign bank account online. However, there are some things that you need to be aware of before doing so. First, you will need to report your foreign bank account to the US Treasury Department each year.
Generally, there's no checking account maximum amount you can have. There is, however, a limit on how much of your checking account balance is covered by the FDIC (typically $250,000 per depositor, per account ownership type, per financial institution), though some banks have programs with higher limits.
The penalties for failing to file an FBAR can be severe. For willful violations, the penalty can be as high as the greater of $100,000 or 50% of the account balance. Non-willful violations carry a penalty of up to $12,500 per violation. In some cases, criminal charges can also be filed.
The Bottom Line
If you plan to deposit more than $10,000 at a bank, remember that the transaction will be reported to the federal government. This enables authorities to track potentially suspicious activity that may indicate money laundering or terrorist activity.
Expats are more likely to face an IRS tax audit than Americans living in the US. By avoiding common IRS red flags, you can reduce your chances of being audited.
To benefit from the Foreign Earned Income Exclusion, the taxpayer must meet one of the following criteria: Works full time in a foreign country for an entire calendar year—known as the Bona Fide Residence Test. Works outside of the United States for at least 330 of any 365 day period—known as the Physical Presence Test.
The IRS charges penalties for both late filing and late payments. If your lack of filing is willful—meaning you knowingly avoided your US tax requirements while living abroad—then more serious legal consequences may apply. Failure to File Penalty: 5% of the unpaid taxes for each month the tax return is late, up to 25%.