How to avoid a 6-figure tax penalty on foreign bank accounts

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Whether you’re an expat or U.S.-based, you may need to report your foreign accounts to the U.S. Department of the Treasury by April 15 — or face costly tax penalties.

The anti-money laundering Bank Secrecy Act of 1970 requires Americans with overseas assets to disclose holdings via a Report of Foreign Bank and Financial Accounts, or FBAR, if the combined value exceeds $10,000 any time during the year, regardless of whether it produced income.

While most Americans know to file taxes, the FBAR can be easy to overlook, said Eric Bronnenkant, a certified financial planner and CPA at Betterment, a digital investment advisor.

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“You can’t file this using commercial tax software,” said Bronnenkant. Instead, account owners must file the FBAR digitally through the Financial Crimes Enforcement Network’s Report 114

One big difference between regular taxes and the FBAR is you report each account’s maximum balance during any point in the year instead of the year-end total, he explained.

For example, let’s say you had a foreign bank account with a $5,000 balance for most of the year. If the amount jumped to $100,000 for one day, you’ll report $100,000 on the FBAR, he said. But you don’t pay taxes on that amount.

Another point of confusion is which accounts to disclose on the FBAR, which may include bank accounts, brokerages or even trusts, according to Jude Boudreaux, a CFP and partner at The Planning Center in New Orleans.

You may not realize you need to report accounts if you have “a financial interest” or “signature authority,” he said.

If you’re overseeing accounts for retired parents in Italy, for example, you may need to disclose those, said Boudreaux. “The definitions are really broad as far as what must be reported.”

FBAR penalties

Source: https://www.cnbc.com/2022/03/24/how-to-avoid-a-6-figure-tax-penalty-on-foreign-bank-accounts-.html