How IRS Investigates Foreign Bank Accounts, Examples

How IRS Investigates Foreign Bank Accounts, Examples

3 Ways the IRS Finds Your Foreign Accounts, Penalty Warnings

When U.S. taxpayers have foreign accounts that they have not reported to the U.S. government, they understandably get concerned that the IRS may receive the information before the taxpayer has an opportunity to get into compliance through one of the offshore amnesty programs. In recent years, the Internal Revenue Service and the U.S. government as a whole have significantly increased enforcement for foreign account and asset-related compliance. As a result, taxpayers with foreign accounts should be aware that the US government has several methods for obtaining information from foreign financial institutions. If the IRS contacts the taxpayer before they have an opportunity to get into compliance, then they are no longer eligible for the amnesty programs. Let’s take a brief look at how this works through examples.

FATCA Example

David is a U.S. citizen who has several accounts in a foreign country. When he opened up the accounts and the foreign financial institution asked him whether he was a U.S. citizen, and he identified that he was. Each year, the foreign financial institution where David banks provides the US government with US account holders’ account information and income associated with the accounts in accordance with the FATCA agreement (IGA), the country entered into with the United States. Even though the US government may not inform David yet that they have the information, the US government would have David’s foreign account information.

IRS Audit or Examination Example

Danielle is a lawful permanent resident who runs her own consulting business in the United States. She recently launched a new business, and due to the substantial amount of expenses she had for her business, she was audited by the IRS. As part of the audit, Danielle received an information document request that asked her if she had any income or accounts from overseas. Since Danielle operates in multiple countries, she has accounts in multiple countries, and since she did not report them, this could lead to potential fines and penalties.

Whistleblower Example

Scott is a U.S. citizen who recently found out that his business partner was cheating on him with his spouse. Scott is aware that both his foreign national spouse and business partner have accounts outside of the United States, which they did not properly report to the US government. Feeling betrayed, Scott completes a whistleblower submission to the IRS identifying both his business partner and his spouse as committing tax fraud and knowingly failing to report foreign accounts, assets, and investments.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. Contact our firm today for assistance.