FBAR Audit: U.S. persons are required to file an FBAR form (aka FinCEN Form 114) to report foreign bank accounts. Whether or not the person files the FBAR, they may become subject to an IRS Audit of their foreign accounts.. There are several FBAR Audit Triggers that can unnecessarily increase the change of the Taxpayer being audited or examined. This could lead to an FBAR Violation. And, since the IRS is aggressively pursuing foreign accounts compliance matters, and issuing civil (and even criminal) penalties, FBAR filers should try to reduce their risk. We will summarize common FBAR audit triggers that may lead to an IRS offshore account examination.
FBAR Information Audit Triggers
There are many different types of FBAR Audit Triggers. With the IRS increased enforcement of offshore account compliance, trust reporting and income disclosure, U.S. Taxpayers are at higher risk of penalties. The failure to properly report foreign money may result in significant fines.
One common question we receive, is How does the IRS Find Foreign Accounts?
With the recent creation of several International Tax Enforcement Groups, coupled by renewed interest in FBAR compliance, along with FATCA enforcement, there are 5 main ways the IRS located unreported foreign money.
IRS Investigations Leading to an FBAR Audit
These are 5 common methods the IRS used to locate and discover Foreign Accounts:
One of easiest ways for the IRS to discover your foreign bank account is to have the information hand-fed to them from various Foreign Financial Institutions. In accordance with FATCA (Foreign Account Tax Compliance Act), more than 110 different foreign countries and more than 300,000 foreign financial institutions are actively reporting us account holder information to the IRS.
FBAR balances can now be considered as part of the reward someone can claim for ratting you out — you have to be careful when not reporting foreign accounts — along with vetting out the company you keep.
IRS Voluntary Disclosure/Amnesty by a 3rd Party
Here’s a common example: David decides he wants to get into tax compliance by entering the voluntary disclosure program. David has co-ownership of certain accounts with other individuals he partnered with for his business. David’s partners are not so keen on getting into compliance and are trying to fly below the radar hoping that the foreign country they picked would not report the foreign accounts. David on the other hand, is very concerned about getting in criminal trouble – since all partners were aware of the reporting requirement.
Therefore David makes the leap to get into compliance.
Unfortunately as part of the compliance process, David has to identify the names of the joint account holders, which can lead to problems for the partners.
The FBAR Examination Process can be Dangerous
If the Internal Revenue Service believes the Taxpayer may have committed a willful FBAR violation then they are probably in for a bit of doozy with the audit. These are typically referred to as eggshell audits or reverse eggshell audits — because either you have information that the IRS does not have but you want to keep contained (without committing perjury) or the IRS has information you don’t know about and they want to see how you maneuver when pressed on the subject.
Either way, when Fraud is a potential issues, Taxpayers should bring an experienced tax specialist attorney with you — this is not the time for bravado. If it ends bad, it could end up with a referral to the Special Agents for a criminal investigation.
Common FBAR Audit Industries
Here are a few common situations we come across:
International Business Consultants
Jeff is an international business consultant.
Jeff misapplied his travel expenses and is under audit, when the examiner sends an IDR (Information Document Request) requesting if Jeff has any bank accounts overseas.
It turns out, Jeffrey has a bank account in each country. And, since the interest rates are high, and the income grows tax-free – Jeff has unreported income as well.
This could lead to an FBAR audit.
Maria has a business in the U.S. The business expanded to multiple foreign countries.
Maria needs to have local accounts in each country, in order to pay her suppliers. Therefore, she has multiple accounts, in different countries.
Maria’s business is under audit, when she also receives an IDR from the examiner asking about Foreign Accounts.
This is a very common FBAR Audit trigger.
Peter is originally from Australia.
He has multiple accounts in Australia, the UK and India – all places he either lived or worked. One of the accounts in India has significant value, since the interest rate is at nearly 8%. The Bank reports Peter to the IRS – along with thousands of other customers – in accordance with FATCA reporting requirements.
Peter receives an FBAR Audit notice.
Avoid an IRS FBAR Audit for Undisclosed Accounts?
While you cannot absolutely avoid an audit, you can reduce the chance of penalties by submitting to one of the IRS offshore disclosure programs.
We Specialize in Streamlined & Offshore Voluntary Disclosure
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure and FBAR Audits.
Contact our firm today for assistance with getting compliant.