Foreign bank account reporting for folks who live in the USA
As nearly as I can tell, if tax forms had Facebook friends, this one would have the fewest. It only applies to people living in the USA who keep money in banks that are located outside the USA. Many of these people don’t even know they are subject to FBAR (pronounced eff-bar) reporting. The form is only available online. Filling it out probably won’t result in taxes, but not filling it out can result in fines and penalties.
The obvious question is, if it’s not a tax form that collects taxes, why is it a tax problem? I’ll share my understanding. If you are living in the USA, the USA wants you to pay income tax. The USA expects that you should pay income tax on whatever income you received during the year, regardless of the source. The source might be a W2 job in Mullica Hill, or interest from a bank in Mays Landing, or your share of the net income from a partnership in Mount Laurel. But it could also be some kind of income from a holding back home in Mexico or Mozambique. (They even expect you to pay income tax on income that you received from an illegal source, but that is outside the scope of this article.)
Every W2 and 1099 that you receive is matched by one sent to the IRS. Non-USA based banks and jobs and trusts and racetracks, however, don’t send any forms to the IRS. Thus, it is very hard for the IRS to figure out what you may have earned from these non-USA based sources. To get a better idea, they expect you to tell them where you keep your non-USA money. Knowing you are part owner of the Merlin Diamond Mine, Australia, or that your family maintains a trust fund for you in Morocco helps the IRS to know what kind of revenue to look for when reviewing your tax return.
Whether or not they are entitled to tax money in relation to any particular source is very personal and certainly beyond the scope of this general education article. You should definitely discuss this with a tax advisor who understands such foreign issues.
In my next post, I’ll review some of the mechanics of filing the FBAR.