Foreign Bank Accounts: When Additional U.S. Reporting May Apply

U.S. taxpayers who hold accounts outside the United States, whether from living abroad, inheriting an account, or maintaining ties to another country, sometimes are not aware that these accounts can carry reporting obligations that go beyond a standard federal tax return.

Why foreign accounts get separate attention

The United States taxes its residents and citizens on worldwide income, and it also requires separate disclosure of certain foreign financial accounts and assets, independent of whether those accounts generate taxable income in a given year. ESBS works with taxpayers who hold or have held foreign accounts, and our tax team is familiar with the general framework of these disclosure requirements.

FBAR / FinCEN Form 114

One of the more well-known requirements is the FBAR, filed as FinCEN Form 114, which applies to U.S. persons with a financial interest in, or signature authority over, foreign financial accounts that in aggregate exceed a certain threshold at any point during the year. This filing is made separately from the federal income tax return and has its own filing system and deadlines.

Form 8938

Separately, the federal income tax return itself may require Form 8938, Statement of Specified Foreign Financial Assets, for taxpayers whose foreign financial assets exceed certain thresholds. The thresholds and the definition of a reportable asset for Form 8938 differ from those under the FBAR, so a taxpayer can potentially have an obligation under one regime but not the other, or both.

• FBAR (FinCEN Form 114) is filed separately from the tax return with its own thresholds.
• Form 8938 is filed with the federal tax return and uses different thresholds and asset definitions.
• Foreign income earned on these accounts is generally reportable regardless of these disclosure filings.
• Foreign tax credits may be available for tax paid to another country on foreign income.

Foreign income and foreign investments

Interest, dividends, capital gains, and other income earned in a foreign account is generally reportable on the U.S. return in the year earned, similar to domestic income. Foreign investment holdings within these accounts can also raise other specialized issues, such as those affecting foreign mutual funds and pooled investment vehicles, which involve their own separate set of rules.

Foreign tax credit considerations

When foreign tax has been paid or withheld on income from a foreign account, a foreign tax credit may be available to reduce U.S. tax on the same income, subject to limitations. Claiming this credit generally requires documentation of the foreign tax paid and a calculation of the applicable limitation, which depends on the taxpayer's overall income picture for the year.

What this means for taxpayers with foreign accounts

This article does not make a filing determination for any individual reader. Whether FBAR or Form 8938 applies, and what the resulting obligations are, depends on account balances, the type of assets held, and the taxpayer's specific facts during the year. These situations often require additional analysis of account statements and prior filings.

If you hold or have held a foreign bank, brokerage, or investment account, it is worth having your situation reviewed rather than assuming a particular filing is or is not required. Our tax team can review your account information and prior returns to help determine what applies to your situation. Contact ESBS to discuss your specific situation.

The information provided is for general educational purposes and should not be considered individualized tax, accounting, legal, or financial advice. Tax rules and reporting requirements depend upon individual circumstances. Please consult with an appropriate professional regarding your specific situation.