How many clients from around the world do you have? It’s more common than ever before to do business in multiple countries and to have multiple businesses in different countries. But what are the tax implications for such arrangements? If you have a business in Vietnam, for example, and a Vietnamese bank account or a European business and a European bank account do you still have to pay tax? Even if you are paid in a foreign currency? As you can see, international business is complex, so it can be easy to unintentionally do business with a “bad bank”.
All of these questions can confuse many people attempting to open an account with a foreign bank but it’s quite simple. The most important thing you can do is avoid putting your money in what the IRS refers to as a “bad bank”. Holding your money in a bad bank can attract IRS investigation. Here’s everything you need to know about foreign banking and how to open a foreign bank account without getting into hot water with the IRS.
A Global Tax System For U.S Citizens
If you are a U.S citizen then you are one of the only countries in the world that has to pay a global tax rate. Holding money in a foreign bank account or doing business in another country even when no money enters the U.S is no guarantee that you will not have to pay tax. You will have to pay tax twice, once in the country in which the money is earned and once in the U.S. Most U.S taxpayers, contrary to popular belief, do pay their taxes and on time and do not try to hide their off shore affairs, despite this tax rate.
All earnings must be declared to the IRS. This also includes Bitcoin. This is a logistical nightmare for many foreign banks who have to declare this income to the U.S government. As a result, many banks refuse to allow Americans to open an account with them unless they are depositing large sums and their tax affairs are in order.
Remember though you can get some – though not all – of your foreign tax paid back to you from the U.S government but this is a timely process which can take a while to sort out.
Sort Out Your Credit Score
There are some things you can do though if you want to increase your chances of getting a U.S bank account. First of all, ensure that you have a solid credit score.
Trying to get a clean credit score can be a challenge but be sure to pay off all credits card across the world and on time. Be sure to make sure any other loans you have are also paid off and also ensure that you have a credit history by taking out a few credit cards and spending on them.
It’s not just the responsibility of the banks to declare this income, its also the responsibility of the citizen if you have more then $10,000 in overseas assets. The form you need to fill in is the Financial Crimes Enforcement Network (FinCEN) Form 114.
Alternatives to Foreign Banks or “Bad Banks”
It might be wise rather than keeping all of your assets in lots of foreign accounts to consolidate them all. You can do this relatively easy. You can open foreign bank account with services like Transferwise or Revolut. They give you bank details in multiple currencies such as Euros, Great British Pounds, and Australian Dollars as well as many Asian and African currencies.
From here they can be transferred back into a U.S account or kept in a U.S currency account with Transferwise. This does not mean you can avoid paying tax in a foreign country but it does make it easier to keep track of how many assets you have or how much capital you have in U.S dollars, rather than trying to keep track of multiple currencies.
You can be paid into these accounts by foreign companies or by clients.
What Happens If You Don’t Declare A Foreign Bank?
In popular culture, many people think it’s easy to hide assets abroad. You just open a Swiss bank account no questions asked. But the IRS and the Department of Justice cannot be fooled this easily. There are lots of signs that you have income in other countries and it is hard to keep it a secret.
You have no way of knowing what tools the government has to investigate. And the penalties are harsh. You could be hit with a $500,000 fine and you could even be sent to jail. It isn’t worth risking it.
Remember that simply forgetting to pay it or forgetting to let the IRS know about your affairs does not exempt you from the rules, like any other law. Non-disclosure and non-payment of taxes are both criminal offenses.
Using A Foreign Bank? Be Sure to Declare Everything
Most Americans have income in foreign bank accounts today. This is just a fact of the modern world and is something to be celebrated and embraced. But the important issue is to make sure you declare your income.
Unlike other countries around the world that allow people to pay taxes only on the money earned in that country, in the U.S you have to pay tax on all income earned from around the world. Whether this seems fair or not you must follow the rules and both disclose your income and pay tax on it.
It is not as simple as opening a secret bank account in Switzerland which no one knows about, your domestic affairs in the U.S and your expenditure as well as agreements between nations and the IRS ensure it is hard to hide your foreign earnings.
The penalties for not paying are harsh and you could even end up in jail. To ensure that this does not happen to be sure to fill in the correct forms such as FinSEN 14 and make sure you declare your income even if you think you don’t have to pay tax on it.
If you need help managing your overseas tax be sure to check out our offshore assets service.