FBAR Audit and What Triggers IRS Offshore Account Investigations

FBAR Audit and What Triggers IRS Offshore Account Investigations

FBAR Audit Triggers

When a U.S. person has foreign accounts, they may have to file an FBAR. The failure to file a timely or accurate FBAR may lead to IRS fines and penalties.

When it comes to filing an FBAR — or making the decision to intentionally not file it — there are several FBAR audit triggers to be aware of.

Some of the triggers preventable, and other triggers are not.

But, by filing a timely and complete FBAR, a Taxpayer can significantly reduce the chances of an IRS examination.

Ever since the Internal Revenue Service made foreign accounts compliance a key enforcement priority, they have significantly increased the number audits for willful and non-willful FBAR violations..

We have developed a case-study example to assist U.S. persons understand how an IRS foreign account examination occurs, and why FBAR filers should try to submit to FBAR Amnesty before penalties are assessed or an audit is commenced.

What Triggers a Foreign Bank Account Audit?

Meet Michael.

Michael is originally from India.

He first came to the United States in 2008 on an H-1B visa.

In early 2010, he was at a dinner party with friends from India, and learned that U.S. individuals (even those on still on Visa and who meet the Substantial Presence Test) are required to file taxes just as any US person would.

Therefore, if Michael became aware that if he had any foreign accounts (which he did) he was required to report the information on an annual FBAR, as well as report the income.

Myth 1: Offshore Reporting is A New Phenomenon

While FATCA may not have come into existence for individual filers until the 2011 tax return and introduction of Form 8938, FBAR reporting dates back to the 1970s.

Michael’s Tax Professional Knows Less Than Michael

When Michael went to see his new tax preparer for the first time, the preparer was relatively new.

When the tax preparer asked Michael about his income, he never made any reference to foreign accounts, and Michael never volunteered the information to him.

Myth 2 – Only Your CPA is in IRS Trouble, Not You

In this particular situation, Michael was aware that he had a reporting requirement.

The mere fact that his tax preparer did not ask him about foreign accounts does not absolve Michael from liability.

In fact, it makes it worse because it clearly shows that Michael was willful, and knowingly did not disclose his foreign accounts or report the income.

Michael’s CPA Learns About Foreign Account Reporting

By 2017 and with the new forms required under FATCA, it would be nearly impossible for tax preparers to not have some knowledge (or at least be aware) of foreign account reporting.

When it’s time for next year’s tax returns, Michael’s CPA sends Michael a organizer asking him to complete all necessary portions. In addition, it asks Michael he had any foreign accounts. Michael does not complete the questionnaire, although he did confirm to the CPA that he received it.

Since Michael did not return the questionnaire (which is not uncommon for clients in general who have a pre-existing relationship with a CPA), the CPA presumed that nothing had changed, and continued reporting Michael’s US income based on the information Michael provided to him.

Myth 3 – Michael did not Actually “Lie” to the CPA

This is not true.

Making an intentional omission is equivalent to making an intentional misrepresentation.

In other words, because Michael was aware that he had foreign accounts that he should have been reporting, but he never reported them – he is knowingly making an intentional misrepresentation to the tax preparer by proactively omitting the information.

As such, the tax preparer is under false pretenses that Michael does not have any foreign accounts or foreign income, which is why he did not report it on the return.

Michael is Audited/Under IRS Examination

Michael returns home from a long day only to find a certified letter from the IRS.

He opens it to learn that the Internal Revenue Service wants to Audit him.

As of now, the Audit has nothing to do with foreign accounts. Rather, Michael (who is a software engineer) also started a side consulting business, and tried to claim some unreimbursed expenses from his W-2 job through his consulting business.

This is a typical red flag, and something the IRS frowns upon.

By embellishing his expenses, Michael was hoping to take more deductions through his consulting business than would not otherwise be available as a W-2 employee, which has the net effect of reducing his tax liability.

Michael Receives an IDR for ALL Income and Accounts

About a week prior to start of the examination, Michael’s CPA (who agree to represent him in the audit) receives an IDR – Information Document Request.

The request is about five pages, and asks questions including (a now standard question) whether Michael has any foreign bank accounts or other foreign money or income that he did not report.

When Michael CPA goes to confirm with Michael, Michael relents and explains to his CPA that he does have foreign accounts and income.

Michael’s CPA is understandably upset, and refuses to represent Michael at the audit. Moreover, now that the CPA will not represent Michael, Michael has to find new representation as well as worry about whether the IRS will ask Michael CPA about Michael’s file.

Michael may become subject to willful FBAR penalty violations, and should seek out an experienced board-certified tax law specialist for counsel.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Beware of inexperienced counsel trying to mislead you about the Streamlined Procedures or Reasonable Cause.

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.