by Brian Mahany
There are tens of millions of dual nationals living both in the United States and abroad. By now, many folks have figured out that the IRS and Justice Department is really cracking down on unreported offshore accounts. Failure to report one’s offshore holdings could land you in prison and mean the loss of your hard earned money. Civil penalties alone can be the greater of $100,000 or 50% of the highest balance of each account and for each year the account was not reported.
Foreign accounts must be filed on a Report of Foreign Bank and Financial Accounts, also known as an FBAR or the TD 90-22.1 form. Those reports must be filed annually. The IRS is running an amnesty program for nonfilers but even those penalties can be quite high. Most of the people we speak with are sitting on the fence and wondering if they should comply (yes) and their chances of getting caught (fairly high and getting worse every day).
Some clients tell us that they are dual nationals and didn’t open their account with a U.S. passport. Quite naturally, they especially wonder if they will get caught should they elect to do nothing.
The obvious reason to comply is the law. Willful failure to file an FBAR is a felony. Although we never suggest to anyone that they skirt the law, many think they can simply do nothing, not get caught and avoid all penalties.
Beginning in 2014, foreign banks are required to investigate and report account holders with ties to the U.S. The big question is whether those folks who used a foreign passport to open their account will get caught. Again, the answer is “maybe.”
The new FATCA law requires banks to perform some basic due diligence on their account holders. (FATCA stands for the Foreign Account Tax Compliance Act.) Obviously, if you opened the account with a U.S. passport, expect to get caught.
Some folks, particularly the dual nationals and ex pats living offshore and holding a local passport, opened foreign accounts using a non-U.S. passport.
In those cases, banks are still required to see if there is any connection between the account and the United States. How? Good question.
At a minimum, foreign banks will be looking to see if there are any U.S. addresses associated with the account. If you receive your statements here, expect the account will be reported.
If your mailing address doesn’t trip you up, watch out for U.S. telephone numbers associated with the account.
Another thing banks will be looking for is your place of birth. When opening an account overseas, many countries require banks to make a copy of your passport (which often lists a country of birth). Some foreign banks simply ask nationality and place of birth on the new account agreement.
The larger the account, the more due diligence is expected to be required. That means sending or receiving wires from the U.S. may also trigger reporting.
Outside of the new FATCA regime, the IRS has been seeking records from credit card clearing companies such as Visa, MasterCard and some of the ATM networks such as Plus. Even if your bank account is in China or Iran (two countries not expected to cooperate with FATCA), using the card repeatedly in the U.S. or taking money out of U.S. ATM machines may also get you flagged. Repatriating cash from foreign accounts through debit cards is popular – the IRS also knows how to find people who try this dodge.
Another problem is that using a foreign passport to open a foreign account may set you up for a foreign wealth tax! Cash strapped governments could begin taxing wealth. Presently, most taxes are based on income but don’t be surprised if a country like Argentina suddenly elects to tax accounts.
Opening a foreign account is 100% legal. Simply make sure that it is properly reported. If you already have an unreported account, then seeking competent legal help is a must. In addition to the IRS amnesty program (the Offshore Voluntary Disclosure Program or “OVDI”), there are also special programs for expats, small dollar accounts, and “opt outs” for those who can demonstrate their failure to file an FBAR was not willful.
Certainly opening a foreign account with a non U.S. passport reduces your chances of getting caught. The risk – reward calculation still favors disclosure, however, particularly when the original failure to report was simply one of ignorance. Penalties can be waived for good cause but ignore the problem and many of your options disappear.
With so many options and looming compliance deadlines, anyone with an unreported account should consult with an experienced tax attorney immediately. The tax lawyers at Mahany & Ertl specialize in offshore reporting issues. For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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