Maintaining a bank account in a foreign country is sometimes a challenging task. Many countries have restrictions on foreign nationals who wish to open a bank account. Transfers between your domestic and foreign accounts over a certain limit must be reported and tracked. Additionally, the IRS requires that all income from foreign sources be reported, including offshore bank accounts.
Opening an offshore bank account may be advantageous if you travel frequently to another country. Having sums of foreign cash available can prevent international transaction fees and the impact of a continually changing foreign exchange rate. Also, international interest rates are often higher than those in the United States; therefore, having a bank account in another country can be a good investment.
IRS Reporting Requirements
What you cannot do with a foreign bank account is hide income for taxation purposes. The romantic notion of the Swiss bank account is largely inaccurate. The Bank Secrecy Act requires the reporting of foreign financial accounts to the IRS annually using form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Financial accounts that maintained a balance of $10,000 or more at any time in the reporting year are included in the FBAR requirements. Instructions for the form provide several allowable reporting exclusions. The FBAR and Form 1040 are filed separately; the FBAR must be received by the IRS by June 30 in the year following the reporting year. Income on a foreign account may have to be reported on the 1040 depending on its type and source. An experienced CPA is a valuable resource if you have foreign financial holdings.
Tax Reporting in the Foreign Country
You may also have tax obligations in the country where the account resides. Every country has its own rules on the taxation of foreign nationals who have domestic-source income. Many countries have entered into a tax treaty with the United States, allowing the U.S. to tax the income. In return, the foreign country taxes its own citizens and residents on U.S.-source income. If you are taxed on income in a foreign country, you may be eligible for the foreign tax credit in the U.S. to eliminate the burden of being taxed in both countries.
Wire Transfer Rules
Every bank has rules about dispersing money between countries. Every country also has its own rules. In 2001, after the World Trade Center bombing, the United States beefed up its money transfer regulations to stop the fraudulent flow of funds related to terrorist activities. When initiating a wire transfer to your foreign account, you must show the bank some form of picture identification and provide them with identifying information that they do not already possess. You may have limits on the amount you can wire abroad daily -- usually $3,000 to $10,000. Transactions over $1,000 may require further documentation concerning the purpose of the transfer.
- IRS.gov: Topic 856 - Foreign Tax Credit
- SEC.gov: Money Laundering: Life After the Patriot Act
- CBIZ: More Stringent Foreign Bank and Financial Account Standards Proposed by Obama White House
- IRS. "FATCA Information for Individuals." Accessed June 18, 2020.
- IRS. "Basic Questions and Answers on Form 8938." Accessed June 17, 2020.
- IRS. "Do I need to file Form 8938, 'Statement of Specified Foreign Financial Assets'?" Accessed June 18, 2020.
- IRS. "2019 Instructions for Form 8938," Page 7. Accessed June 18, 2020.
- IRS. "Form 8938." Accessed June 18, 2020.
- IRS. "Comparison of Form 8938 and FBAR Requirements." Access June 18, 2020.
- IRS. "2019 Instructions for Form 8938," Page 9. Accessed June 18, 2020.
Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.