How Does a Foreign Bank Account Work?

Two Types of Accounts

Foreign bank accounts basically come in two types. The typical passbook account and secret accounts. The passbook account is a secure bank account with some degree of confidentiality, but otherwise it is a typical account run in much the way accounts in U.S. banks operate. Secret accounts are more secure, with security features for accessing such as passwords and account book verification.

Opening an Account

To open an account, you need to find someone in the country the bank is located to help you get all of the necessary paperwork filled out and turned in. In the matter of a normal bank account, it is pretty straight forward, just as it is in the U.S. The bank however will have to have a reason for the account, such as a business venture or an access for family overseas.

As for secret accounts, like the ones where there are no names, just account numbers, a facilitator is used to help open the account. The facilitator will make sure the person is who he says he is and that he is on the up and up. This means he will make sure the person wanting to open the account is not trying to do so for tax evasion purposes. Once this is checked the account will be opened. Depending on the size of the account, the person requiring the account might be asked to go to the country in question to fill out paperwork in person.

Reporting

Even if you do have a bank account in a foreign country, this does not get you out of filing the funds or interest earned from them, on your U.S. tax return. Most overseas banks make sure that you are willing and able to file your U.S. taxes with a claim to the foreign accounts. The form that must be filled out is TD F 90-22.1. It should be filled out by individuals and companies alike but is only required for accounts that hold more than $10,000 at any point during the year. If a person fails to file on a foreign account and the IRS discovers the issue, there can be consequences such as jail or fines up to $500,000.