Foreign Income Exclusions and Tax Credits

• If the money in your foreign account represents income you earned while physically present overseas, you may be able to deduct up to $91,500 from your taxable income. You will forfeit this exclusion, however, if you fail to claim it by reporting it on Forms 1040 and 2555. You may also deduct the amount of taxes paid to foreign governments from your total tax due. If you fail to report this income and the IRS finds out, you will be subject to taxation by both the IRS and the government with jurisdiction over the account.
  
  

Failure to Pay on Time

• If you fail to pay taxes on all of your income by the due date, the IRS can assess a penalty of as much as 100 percent of your back taxes, plus interest. If the IRS determines that your failure to report your foreign account was negligent and resulted in an underestimation of your tax burden by the lesser of 20 percent of the tax due or $5,000, it can fine you an amount equal to an additional 20 percent of your overdue taxes.
  
  

Filing a Frivolous Return

• If you file a tax return that fails to include enough information to allow the IRS to calculate your taxes, or rely on a frivolous argument to avoid taxation, the IRS may fine you $500 in addition to any other applicable penalties. Failing to report the income contained in a foreign account will prevent the IRS from calculating your tax burden. An example of a frivolous argument would be to assert that you are not required to report foreign accounts because the IRS has no jurisdiction overseas.
  
  

Tax Evasion

• Tax evasion is the intentional use of deceptive practices to avoid paying taxes or having taxes assessed -- making false statements, for example, or selectively presenting facts to mislead the IRS. If the IRS determines that you used such methods to intentionally hide taxable income in a foreign account, it may prosecute you for tax evasion. Tax evasion carries a penalty of up to five years in prison and a $100,000 fine. You will also have to pay back taxes, penalties and interest, as well as the costs of prosecution. Corporations can be fined up to $500,000, and personally culpable officers and directors can be imprisoned.