Germans constitute one of the largest immigrant communities in the United States. Oftentimes, Germans continue to maintain close ties to their home country, including German bank accounts. Having a German bank account, however, may result in a significant US tax compliance burden for their owners. In this article, I will identify the three most common US tax reporting requirements that may apply to German bank accounts.
German Bank Accounts: Who Must Disclose Them to the IRS?
Before we delve into discussion of how German bank accounts need to disclosed to the IRS, we need to identify who must disclose them. This task is complicated by the fact that US reporting requirements do not have a uniform definition of “filer”. Rather, almost each one of them has its own term which contains slight (and sometime more profound) differences from each other.
Nevertheless, the concept of “US tax resident” provides the most common basis for all of the definitions of a filer. A US tax resident is a broad term that covers: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and persons who declare themselves as US tax residents. This general definition of US tax residents is subject to a number of important exceptions; almost all of these exceptions apply to either the Substantial Presence Test, first-year and last-year definitions of a US tax resident.
Other US reporting requirements adopted different definition of filers, but they mostly share the same categories of US taxpayers with the concept of US tax residency. For example, Form 8938 identifies its filers as “Specified Persons” (a concept that is applied increasingly throughout US tax code after the 2017 tax reform). FBAR (which is not technically a tax form) defines its filers as “US Persons”. Yet, both of these terms largely coincide with the definition of US tax residents.
The differences between these three terms are mostly limited to persons who declare themselves as US tax residents. A common example are the treaty “tie-breaker” provisions, which foreign persons use to escape the Substantial Presence Test for US tax residency purposes.
The determination of your US tax reporting requirements is the primary task of your international tax lawyer. I strongly recommend that you do not even attempt to do this yourself or use an accountant for this purpose. It is simply too dangerous.
German Bank Accounts: Worldwide Income Reporting
Let’s begin with our discussion of US tax reporting requirements with the most basic concept of US international tax law – the worldwide income reporting requirement. Like most other income tax concepts, worldwide income reporting requirements applies to US tax residents.
Basically, all US tax residents must report their worldwide income on their US tax returns. This means that they must disclose to the IRS on their US tax returns both US-source and foreign-source income. This requirement applies to all types of foreign-source income: bank interest income, dividends, royalties, capital gains and any other income.
Of course, German bank accounts owned by US tax residents are not an exception. On the contrary, all income generated by these accounts must be disclosed on the US tax returns of their owners.
This income from German bank accounts must be disclosed in the United States even if it is subject to German tax withholding or reported on a German tax return. It also does not matter whether the income was transferred to the United States or stayed in Germany; it must still be reported to the IRS.
German Bank Accounts: FBAR/FinCEN Form 114
FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (“FBAR”), requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over German (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. I encourage you to search our firm’s website, sherayzenlaw.com, for the definition of “US Persons” and the explanation of other parts of the FBAR requirement.
The definition of “account”, however, deserves a special mention here, because it is a primary source of confusion among US taxpayers with respect to what needs to be reported on FBAR. This confusion stems from the fact that the FBAR definition of an account is substantially broader than what this word generally means in our society. “Account” for FBAR purposes includes: checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.
Finally, FBAR has a very complex and severe penalty system. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.
Civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. In 2015, the IRS added another layer of limitations on the FBAR penalty imposition. One must remember, however, that these are voluntary IRS actions and may be disregarded by the IRS whenever circumstances warrant such an action.
German Bank Accounts: FATCA Form 8938
FATCA Form 8938 is filed with a federal tax return and forms part of the tax return. This means that a failure to file Form 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.
Form 8938 requires “Specified Persons” to disclose on their US tax returns all of their Specified Foreign Financial Assets (“SFFA”) as long as these Persons meet the applicable filing threshold. The filing threshold depends on a Specified Person’s tax return filing status and his physical residency.
The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to report same foreign assets on FBAR and Form 8938.
Specified Persons consist of two categories of filers: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.
Finally, Form 8938 has its own penalty system which has far-reaching income tax consequences (including disallowance of foreign tax credit and imposition of 40% accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.
Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your German Bank Accounts
If you have German bank accounts, you should contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues, and We can help You!