For a “U.S. person” (a U.S. citizen, a U.S. tax resident, or certain entities), owning bank or investment accounts outside the United States is completely legal. The obligation is transparency: all foreign financial assets must be reported, and any income they produce must be declared. This is because the U.S. taxes worldwide income.
With FATCA and the global information-exchange systems now in place, the IRS has far greater visibility into foreign accounts. As a result, timely compliance—or correcting errors before the IRS contacts you—is essential for managing risk.
Reporting Duties, Examples, and Penalties
Two Separate Reporting Regimes (Often Confused)
FBAR (FinCEN Form 114)
You must file an FBAR if the total value of all your foreign financial accounts exceeded $10,000 at any time during the year, even for one day.
FBARs are filed electronically with FinCEN, not with your tax return. They are disclosure forms, not tax calculations—but penalties for failing to file can be severe, including criminal liability in serious cases.
FATCA (Form 8938)
Form 8938 is attached to your IRS tax return when the value of your “specified foreign financial assets” exceeds certain thresholds (for single U.S. residents: $50,000 at year-end or $75,000 at any point; higher limits apply to joint filers and those living abroad).
Importantly, FBAR and Form 8938 are separate requirements; filing one does not satisfy the other.
The Core Rule: Report Foreign Income
In addition to reporting the accounts, you must report all foreign-source income on Form 1040—interest, dividends, rental income, capital gains, and similar items.
Keeping money abroad does not remove it from U.S. taxation. Any relief comes from foreign tax credits or treaty rules, not from non-reporting.
Example:
Ana, a U.S. citizen living in California, had the following in 2024:
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- Savings account in Mexico: peak value $7,000
- Investment account in Spain: peak value $6,500
- Total yearly interest: $400
Tax results:
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- FBAR required — combined peak value = $13,500, above the $10,000 threshold.
- Form 8938 not required — $13,500 is below the FATCA threshold for a single U.S. resident.
- Income taxable — Ana must report the $400 interest, and may claim a foreign tax credit if foreign taxes were paid.
Penalties
FBAR penalties depend on whether the failure was non-willful or willful.
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- Non-willful cases can still carry substantial civil penalties.
- Willful cases can lead to very large civil penalties and possible criminal charges.
FATCA penalties begin with a base penalty for not filing Form 8938, and additional amounts accrue when a taxpayer continues to ignore IRS notices.
Comprehensive Correction: Streamlined Filing Compliance Procedures
If the taxpayer’s failures were non-willful, and the IRS has not yet made contact, the Streamlined Programs allow a controlled path back to compliance:
SDOP (Streamlined Domestic Offshore Procedures – for U.S. residents)
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- File 3 years of amended or delinquent tax returns
- File 6 years of FBARs
- Pay tax and interest
- Pay a 5% penalty on the highest aggregate value of foreign assets
- Submit Form 14654 certifying non-willfulness
SFOP (Streamlined Foreign Offshore Procedures – for non-U.S. residents)
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- Same filings as SDOP (3 returns + 6 FBARs)
- No 5% penalty
- Use Form 14653 to certify non-willfulness
If there is evidence of willfulness, the Streamlined programs are not appropriate; the Voluntary Disclosure Program is typically the safer route.
Narrow Correction: Delinquent FBAR Submission Procedures
This option applies only when the taxpayer’s sole error was failing to file FBARs, and:
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- There is no unreported foreign income
- No additional tax is due
- The taxpayer is not under audit
- The IRS has not contacted the taxpayer about the missing FBARs
In these cases, the fix is to file the late FBARs electronically. When the taxpayer is eligible, the IRS generally does not impose penalties.
However, if other foreign reporting forms or foreign income issues exist, this procedure cannot be used.
Practical Impact and Prevention
Because FBAR thresholds apply to the total value of all foreign accounts, several small accounts can trigger a filing requirement.
Meanwhile, FATCA reporting by foreign banks increases the likelihood the IRS will learn of unreported accounts.
Taxpayers and advisors should:
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- Review Schedule B foreign-account questions every year
- Track maximum annual balances
- Keep account statements for at least five years
- Carefully choose the correct correction method—Streamlined for broader non-willful issues, Delinquent FBAR for FBAR-only omissions
We Can Help!
Foreign accounts are legal; failing to report them is not.
FBAR, Form 8938, and worldwide income reporting form the foundation of offshore compliance. When past omissions occur, Streamlined procedures and Delinquent FBAR submissions provide structured, lower-risk options to return to compliance. Acting proactively remains the most secure approach.
Have questions? Need advice? Contact our office for a confidential consultation today.
