There's nothing wrong with or illegal about Americans owning foreign bank accounts. In many cases, it's perfectly logical. Many Americans live overseas off their Social Security income, and they need bank accounts for their savings. Others are overseas investors and need bank accounts to fund their investment transactions. Whatever the reason, there's no need for an American citizen to shy away from opening a bank account overseas. However, there are usually additional paperwork requirements, especially in wake of recent tax law changes.
TL;DR (Too Long; Didn't Read)
American citizens can legally open and maintain foreign bank accounts. That being said, specific reporting requirements will likely be involved that differ from those affiliated with domestic accounts.
Report of Foreign Bank and Financial Accounts
Internal Revenue Service form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts, is known informally as the Foreign Bank Account Report. Since 2004, enforcement of this rule has become more stringent. In spite of the name, not all Americans that have overseas bank accounts are required to file this form. However, you must file an Foreign Bank Account Report if your overseas account held at least $10,000 at any time during the year.
Filing a Foreign Bank Account Report doesn't get you into trouble with the IRS or any regulatory agency. However, not filing one when you are required to can trigger penalties. Non-willful violations face a fine of up to $12,459. Willful violations could trigger penalties of the greater of $124,588 or 50 percent of the value of the account, per violation.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act is to financial institutions what the Report of Foreign Bank and Financial Accounts is to individuals. The act requires foreign banks to report foreign assets held by American account holders.
The Foreign Account Tax Compliance Act is part of the broader Hiring Incentives to Restore Employment Act, which contains a provision for U.S. account holders as well. Under the Hiring Incentives to Restore Employment Act, Americans with foreign assets exceeding certain levels must report those assets. Reporting thresholds vary depending on filing status and residency but are lowest for separately filing taxpayers living in the United States, at $50,000. Married taxpayers who file jointly and live abroad have the highest filing threshold, at $400,000.
To comply with the Foreign Account Tax Compliance Act, qualifying taxpayers must file Form 8983 with their taxes. This requirement is separate from the Foreign Bank Account Report filing requirements, meaning some taxpayers will have to file under both laws.
Overseas Investment Accounts
Even with all of the reporting requirements, sometimes having an overseas bank account can make a lot of sense. In addition to funding your lifestyle if you're an overseas resident or frequent visitor, overseas investment accounts may give you access to opportunities you can't find in the U.S. For example, some overseas bank accounts pay much higher interest than you can earn in the U.S. You may also have access to specific investments, such as local shares of stock, that you can't find in America.
- The Houston Business and Tax Law Journal: Evolution of the FBAR: Where We Were, Where We Are, and Why It Matters
- Investopedia: How to Open and Access an Offshore Bank Account
- IRS: Report of Foreign Bank and Financial Accounts (FBAR)
- IRS: Foreign Account Tax Compliance Act
- IRS: Summary of FATCA Reporting for U.S. Taxpayers
- Investopedia: Foreign Savings Accounts: Should You Open One?