Audit Risk for IRS Streamlined Offshore Procedure FBAR Cases

How Likely is an IRS Streamlined Offshore Submission Audit?

Streamlined Offshore Audit Risk is on the IRS

The audit risk for Streamlined Disclosure Audit for FBAR & Tax Returns has increased since the initial launch of the Streamlined Program.  Complicating matters more, is that the IRS streamlined disclosure audit process and timeline can be daunting. First, there is the general rule of a three-year statute of limitationsBut, if there is substantial underreporting, or more than $5000 dollars of income generated from certain foreign accounts and assets, the IRS audit timeline extends to six years. And, if the Internal Revenue Service believes a taxpayer may have committed civil tax fraud, the statute does not expire. Moreover, in recent years, the IRS has been utilizing aggressive tactics on matters involving foreign accounts compliance. Therefore, it is important to get into (or stay) in compliance with offshore accounts and reporting.

Streamlined Disclosure Cases & the IRS

The chance of receiving an IRS notice of a Streamlined Disclosure Audit is on the rise, and is generally a complex undertaking due to the complications of reporting foreign income, assets and investments (FBAR, FATCA, PFIC, Form 5471, etc.). In general, the number of IRS Streamlined Disclosure Audits are on the rise — while overall the chance of being audited is still relatively low.

How Far Back Can the IRS Audit You?

A common question we receive, is how far back the IRS can audit taxpayers who submit to the streamline program. The same general rules apply as they would outside of a streamlined disclosure submission:

3-Year Statute of Limitations

In general, the IRS has three years to audit taxpayers. For example, if a person file tax returns timely in 2020 the analysis goes like this:

      • 2019 tax returns are due to be filed by April 15, 2020

      • Whether or not it is filed before April 15, that is the key date

      • The IRS has three years to audit the return

        • Therefore, the audit would expire in April 15, 2023

If the tax return is not filed timely, the same three-year (3) statute of limitations applies, but the three years does not begin to run until after the tax returns filed. In other words, if a person files a 2015 tax return late in 2020, the IRS still has three years to audit.  Stated another way, filing a tax return late does not reduce the amount of time the IRS has to audit the return — but may impact the taxpayer’s ability to claim a tax refund.

6-Year Statute of Limitations  (Section 6051)

There are two (2) main situations in which the IRS audit timeline statue of limitation will extend to six (6) years. The first situation is when there is a substantial amount of underreported income. The second example is when a person generates $5000 worth of income from certain foreign assets.

IRC Section 6051

      • Substantial omission of items

        • Except as otherwise provided in subsection (c)—

          • (1) Income taxes In the case of any tax imposed by subtitle A—

            • (A) General rule If the taxpayer omits from gross income an amount properly includible therein and—

              • (i) such amount is in excess of 25 percent of the amount of gross income stated in the return, or (ii)such amount—

              • (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and

              • (II) is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.

            • (B)Determination of gross income For purposes of subparagraph (A)—

              • (i)In the case of a trade or business, the term “gross income” means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services;

              • (ii) An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income; and

              • (iii) In determining the amount omitted from gross income (other than in the case of an overstatement of unrecovered cost or other basis), there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.

Streamlined Disclosure Fraud

Streamlined Disclosure Fraud is on the rise. The typical situation occurs when an unsuspecting person is misled about the streamlined disclosure program, and still submits to the streamlined program even though they are willful. Civil tax fraud statute of limitations has no expiration. There are limitations when it comes to criminal tax fraud, but civil tax fraud is unique. If the IRS has sufficient facts to show that a person may have committed civil tax fraud then neither the 3-year nor 6-year statute of limitations will apply. If the IRS believes that a streamlined disclosure case was submitted fraudulently, it may lead to willful penalties, audit and criminal investigation.

We Specialize in Streamlined & Offshore Voluntary Disclosure

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure

Contact our firm today for assistance with getting compliant.