It may not seem intuitive to report income from foreign countries and accounts in a U.S tax form, but it is required by law. You must include all income, wages, and interest from the year, even those earned in offshore accounts. Doing so does not necessarily mean that you will owe taxes on your offshore accounts, but avoiding/refusing to include them on your tax returns is very serious.
If you have a foreign account, you may need to fill out a Report of Foreign Bank and Financial Accounts (FBAR) form. An FBAR is mandatory if the total worth of your foreign accounts was over $10,000 at any point in the past year. This includes a single account with a worth of over $10,000 or multiple accounts whose totals add up to more than $10,000.
It's important to note that, even if you don't need to file an FBAR, you must still report all of your earnings from offshore accounts on your tax return. As a general rule of thumb, you should be candid on your tax returns. Do not try to hide how much you actually earned for the year or fail to include all of your income, wages and interest.
Penalties for incorrect filing
If you do not include offshore accounts on your tax return and/or do not file an FBAR when you are required to do so, the consequences can be serious. This is viewed as tax evasion or tax fraud. Penalties vary depending on non-willful vs. willful violation, with willful violation being more severe. Non-willful violation would be an instance in which someone truthfully did not know about FBAR or did not know that they had to report offshore earnings on your U.S. tax return. In cases like these, they can still receive fines of up to $10,000.
In a willful violation, however, fines can reach a sum of up to $100,000 and you may go to jail for up to ten years. This is why it is crucial to understand the implications of owning foreign accounts and how to report them on a tax return.
What to do if you made an error
If you missed any part of the offshore account tax process, you still have options. Disclosing your error to the IRS before they begin an investigation on your taxes can greatly decrease or eliminate penalties for tax fraud.
However, before you report to the IRS, it is always wise to consult a knowledgeable attorney first who can review your situation, advise you on what options you have and suggest the best course of action. Filing taxes is already a confusing process for most people, so it is important to fully understand everything you need to include and to get professional help in the process, especially when offshore accounts are involved.