This article was first published on August 24, 2011. It was updated on June 16, 2014, with information relevant to the 2013 and 2014 tax years.
Most expatriates love travelling around the world and, along the way, they’re likely to stash monies in different countries, oblivious to how this affects their US expat taxes. After time, this can cause some confusion with the US reporting requirements for offshore bank accounts, the implications of international wire transfers, and what to do with the interest income earned from these various accounts. This article will explain the implications on US expat taxes from holding financial accounts in various countries.
Reporting Requirements for US Expat Taxes
Regarding US expat taxes , the most important thing to know about having authority over foreign financial accounts is the filing requirement for the Form FinCEN 114 Report of Foreign Bank and Financial Accounts (FBAR). Any US citizen who has financial authority over one or more foreign account(s) whose cumulative balance(s) exceeded $10,000 at any one time during the calendar year must file the FBAR with The Treasury Department, separate from their US expat taxes. This form must be filed electronically to the Treasury on June 30 of the following year.
Undoubtedly, one of the first difficulties considered when managing financial accounts in different countries is the risk of currency conversion when moving monies between countries, and the associated impact on US expat taxes. There are different ways to control this risk. Most people will consider using their banks to perform wire transfers between their international accounts, but banks can charge high flat rates and currency exchange fees. However, there are many different financial service providers that will facilitate the transfer of funds between bank accounts in different countries in a more sophisticated manner. These financial service providers help to mitigate currency risk of those paying US expat taxes by offering the following exchange choices:
- Spot Contracts: A spot contract allows you to buy or sell foreign currency at today’s exchange rate, with settlement occurring typically two business days later.
- Forward Contracts: A forward transaction enables you to buy or sell a currency at a fixed rate on a specified future date.
- Currency Options: These give you the “option” of completing a transaction at a previously agreed upon exchange rate.
When determining where to establish your foreign bank account, you will undoubtedly want to take into account the financial stability of the country, the level of regulation in that particular financial market, the impact on your US expat taxes and/or your personal convenience. Can the bank manage accounts in multiple countries or currencies? Are they familiar with the reporting and recordkeeping requirements of US expat taxpayers?
When managing multiple financial accounts, it’s important to plan properly and be forward-thinking. If you are a moving from Germany, and decide to retain ownership of your German home to use as a rental before you move, you’ll want to consider retaining your German bank account for ease of doing business with your rental property. Each time you transfer money internationally, you’ll likely incur transfer and exchange rate fees. Planning ahead to minimize your international transfers will ultimately save you money, and potentially reduce reporting requirements on your US expat taxes.
Recordkeeping and strong organizational skills are imperative when managing financial accounts in different countries. Most US citizens expect to receive monthly and annual statements detailing all of the transactions in their financial accounts. However, this is not the norm in every country, particularly if there are no domestic taxes associated with these accounts. It is the responsibility of the US expat taxpayers to maintain good records regarding their offshore financial accounts, so they can be accurately reported (if required) to the IRS at the end of each year, via the FBAR. If you are lucky enough to receive monthly statements, make sure these are retained and organized. If you do not, you will need to be more proactive in your recordkeeping to streamline the filing of your US expat taxes. Maintain your own spreadsheet to track you monthly and year-end account balances, so you will know whether you are required to file an FBAR with the IRS by June 30th.
Another important factor to remember is that your US expat taxes will need to be reported in US dollars. If you maintain a spreadsheet, you can easily add a formula with the currency exchange rates applicable on the particular date. To aide in the filing of US expat taxes, the IRS provides annual exchange rates on their website, or oanda.com is another widely accepted source for exchange rates. You can also use the yearly average to convert your monies at the end of the year, which is generally the easiest and most popular method.
Over the past decade, the IRS has increased its focus on offshore accounts, and they’re finding more and more ways to discover the undisclosed accounts of US expat taxpayers who fail to report them. Why do they care so much about offshore bank accounts? Because some of these financial accounts generate significant amounts of interest income to US expat taxpayers! If this isn’t being reported to the US, then the US isn’t getting its share.
One method that the IRS uses in finding these offshore accounts is through Currency Transaction Reports (CTRs). Any US financial institution involved with any transaction (deposits, transfers, exchanges, withdrawals, etc,) exceeding $10,000 is required to file a CTR with the IRS. The currency used includes Federal Reserve notes, foreign bank notes, or any money of any country deemed legal tender. Also, the banks are not required to inform you prior to filing a CTR with your information. Furthermore, if you become aware of the CTR reporting requirement after requesting the transaction and subsequent request to stop, the bank representative should continue with the original transaction and CTR per your original request.
Another relevant discussion to this topic is the 2011 Offshore Voluntary Disclosure Initiative (OVDI). The 2011 OVDI provides an opportunity for any US expat taxpayer who is out of compliance with his or her FBAR filings to become compliant with reduced penalties. The 2011 OVDI must be taken advantage of (or extended) by August 31, 2011. Part of the requirements for participating in the 2011 OVDI is that the US expat taxpayer must agree to cooperate with the IRS as requested by providing information about offshore financial accounts, institutions and facilitators. As the IRS processes all of the information from participants in the 2011 OVDI, the risk of your undisclosed offshore financial account being discovered by the IRS will escalate. The penalties will be assessed at their maximum levels, which can include hundreds of thousands of dollars and possible criminal charges. Read more about the 2011 OVDI in our “US Expat Taxes Explained” series.
Retirement planning is a big challenge for US expat taxpayers. They are often approached with private pension schemes that promise big returns, yet charge high fees and have stringent investment requirements. Many expats are convinced that this is the only retirement investment mechanism for them, and sign on the dotted line, realizing too late the lack of flexibility and high associated fees. In addition, the US does not typically allow for the domestic tax advantages of offshore retirement plans. Retirement planning should best be discussed with multi-national investment institutions that can provide reliable advice and portable coverage. These large firms can typically provide solid advice regarding the tax implications of retirement plans, as well as the disadvantages and advantages associated with your US expat taxes.
Questions About US Expat Taxes?
Having accounts in multiple countries can be confusing for American expats, but having an understanding of the filing requirements and staying up to date with your recordkeeping can reduce the hassle. Contact us if you have any other questions regarding your accounts or other questions related to US expat taxes.
UPDATE: The 2012 Offshore Voluntary Disclosure Program was launched in early 2012 and as of the writing of this article does not have a closing date. For more information on this program please visit https://www.greenbacktaxservices.com/blog/irs-introduces-offshore-voluntary-disclosure-program/.