Keeping $400,000 in a European bank account may seem like a smart move to put savings beyond Washington’s reach. However, the United States taxes its citizens on worldwide income, and failing to report foreign accounts can trigger penalties exceeding the original tax bill. Under Section 61 of the Internal Revenue Code (IRC), interest earned on a foreign deposit counts as gross income and is generally subject to the same federal income tax rates as interest from a domestic account. The tax on the interest is rarely the problem. However, two missing disclosure forms can multiply the total bill several times over, before the Internal Revenue Service (IRS) adds interest. The potential costs are concerning given gaps in enforcement. A Treasury Inspector General for Tax Administration (TIGTA) audit released April 8, 2026, found that the IRS identified hundreds of noncompliant offshore account holders but largely failed to follow through. That shortfall does not remove taxpayers’ reporting obligations, leaving those who fail to disclose foreign accounts exposed to substantial penalties. Also read: Roth 401k match could trigger a surprise tax bill IRC Section 61 subjects offshore income to the same tax rate as domestic deposits The U.S. worldwide tax system rests on a single clause that has survived a century of legal challenges. Section 61 defines gross income as “all income from whatever source derived,” including interest, pensions, and investment gains. The Supreme Court upheld that global reach in Cook v. Tait (1924), establishing Washington’s authority to tax citizens regardless of where income originates. IRS Publication 17 spells out the obligation: A U.S. citizen with a foreign interest must report it whether they live inside or outside the country, and whether or not a foreign bank sends a Form 1099. The foreign earned income exclusion shields up to $132,900 of wages for qualifying expats in 2026, but interest, dividends, and individual retirement account withdrawals remain fully taxable because the exclusion covers only earned income. How 2 missing forms inflate a $3,520 tax bill to $14,928 Let’s say a married couple files jointly in the 22% bracket. They have $400,000 in a European bank earning 4%, resulting in $16,000 in interest and generating $3,520 in federal tax — the same amount they would owe on a domestic deposit. The penalties begin when the couple fails to report the account to two separate agencies. Joint filers must attach Form 8938 once foreign assets top $100,000 at year-end or $150,000 at any point under IRC Section 6038D, and file a Report of Foreign Bank and Financial Accounts (FBAR) once offshore balances exceed $10,000 in aggregate. More Personal Finance: Pay raises trail inflation so Ramit Sethi says, “Ask for $5,000” Your home insurance deductible could be $20,000. Would you be ready? Why your next car purchase will be an affordability nightmare Assume the couple reports nothing, IRC Section 6662(j) doubles the standard accuracy penalty to 40% when an undisclosed foreign asset causes the underpayment, adding $1,408 to the unpaid $3,520 tax. Section 6038D adds a flat $10,000 penalty for a missing Form 8938, plus $10,000 for each 30-day period it remains outstanding after IRS notice, up to a maximum of $50,000. The combined bill reaches $14,928 before interest and before any FBAR penalty, and Section 6501(e) extends the IRS’s assessment window from three years to six. Failing to file two foreign account forms can turn a $3,520 federal tax bill into $14,928, before interest and additional penalties. RealPeopleGroup / Getty Images A federal watchdog found the IRS examined fewer than 3% of flagged accounts Despite spending nearly $683 million on Foreign Account Tax Compliance Act (FATCA) enforcement since FATCA’s enactment, the IRS has struggled to turn detection into consistent collection. TIGTA’s April 2026 audit reviewed Campaign 896, an IRS program targeting egregious FATCA non-filers, and found that identification far outpaced follow-through. The campaign flagged 405 noncompliant taxpayers, referred 164 for possible examination, and ultimately examined only 12. Fewer than 3% ever faced an audit, and only five of the 12 cases produced a financial result: $39.7 million in additional tax and $80,000 in penalties assessed. Robert J. McLeod, an Associate at Kostelanetz LLP who analyzed the audit for The CPA Journal, argued the report’s value is forward-looking because the IRS already holds enough data to pursue the remaining cases at scale. The practical lesson of the TIGTA report is not to predict when the IRS will act, but to prepare clients before it does, TIGTA made three recommendations: assess failure-to-file penalties through Campaign 896, integrate Form 1099 data for flagging additional nonfilers, and add campaign-specific performance measures. IRS management rejected two of the three recommendations and only partially agreed to evaluate the Form 1099 integration. What to ask your tax preparer about international returns The Internal Revenue Service removed its Delinquent FBAR Submission Procedures on July 1, 2026, eliminating a longstanding guarantee that qualifying late filers would face no penalty, Ernst & Young noted in a July 2026 tax alert. FBAR penalties are now fully discretionary: non-willful violations can cost up to $16,536 per annual report, while willful violations reach the greater of $165,353 or 50% of the account balance, according to the U.S. Treasury Regulations. The IRS Streamlined Filing Compliance Procedures remain open for taxpayers who also omitted the income itself, with eligible expats abroad qualifying for a 0% penalty. Taxpayers with foreign accounts should ask their preparer for a clear annual reconciliation among Form 8938, the FBAR, and Schedule B before every filing deadline, McLeod recommended in The CPA Journal. Filing the three forms correctly each year eliminates the accuracy surcharge, the Form 8938 penalty, and the extended audit window, leaving only the standard tax that would apply to the same deposit at a domestic bank. Related: Schwab flags the overlooked risk in skipping foreign stocks
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