FBAR Audit – Case Study Example of an IRS FBAR Investigation (2018)
FBAR Audits are on the rise. And, due to the introduction and enforcement of FATCA, IRS FBAR audits in particular can be a very traumatic experience for individuals and businesses alike. Moreover, if the IRS tax audit also includes international tax issues, the stakes are even higher.
- 1 FBAR Audit
- 2 The Ramifications of Non-Disclosure – A Case Study
- 3 Background
- 4 Michelle Did Not Complete that Portion of the Questionnaire
- 5 IRS Audit of Domestic Earnings
- 6 What Happens Next?
- 7 Are You Already Under Investigation?
- 8 Contacting Your Bank Manager
- 9 Showing up at Your Home, Unannounced
- 10 Showing up at your Employment or Place of Business
- 11 Sudden Stopping of Communication From the IRS
- 12 Interviewing your CPA
- 13 Golding & Golding: About Our International Tax Law Firm
When it comes to international tax, some of the key issues that spark a tax audit are the following:
- Unreported foreign bank accounts
- Unreported foreign securities or other investment accounts
- Unreported foreign income (passive income or earned)
- FBAR (Report of Foreign Bank and Financial Accounts)
- Schedule B (Question 7)
- Form 8938 (Statement of Specified Foreign Financial Assets
- Other International Forms (3520, 3520-A, 5471, 5472, 8865, etc.)
The Ramifications of Non-Disclosure – A Case Study
The failure to report foreign accounts can have far-reaching effects, way beyond any potential scope you may have considered prior to finding yourself in the situation.
We recently spoke with an individual who found herself in this type of situation, which could have easily been avoided. Unfortunately, due to the fact that her case has an element of willfulness, the individual may become subject to extensive fines and penalties, including willful FBAR and Form 8938 Penalties.
Michelle has foreign accounts. She said foreign accounts for many years and while English is not her first language she speaks it fluently. Michelle’s tax return is not too difficult, but she decided to use a CPA to prepare taxes since she has her own side business as a consultant.
Michelle’s CPA & FATCA
Early in the relationship, the CPA did not utilize a questionnaire and the topic of foreign accounts were never discussed. Fast-forward to 2010 and with the implementation of FATCA (even though it would not be enforced until 2014), and the integration of IRS form 8938 (2011), the IRS made offshore money an enforcement priority.
With the introduction of form 8938, there was renewed interest in the FBAR as well. As a result, this particular CPA was smart, and included one or two questions regarding the foreign accounts on his questionnaire. The questionnaire was only two pages long, so it was clear to Michelle that there was a question regarding foreign accounts, and she understood the question.
Michelle Did Not Complete that Portion of the Questionnaire
The way the question was formulated, it asked the individual to identify foreign accounts if the individual had them. It was not a straight yes or no question. Nevertheless, because Michelle did not answer that question by identifying any of her foreign accounts or foreign income, the CPA never delved further into questioning her regarding the account — he was most likely not required to.
IRS Audit of Domestic Earnings
About two years later, Michelle was audited regarding her consulting business. The consulting business has nothing to do with offshore disclosure. The purpose of the audit was due to the similarities between the expenses she claimed for employment and the ones she claimed for her consulting business.
Here’s the problem: when a person is under audit they have a proactive responsibility to disclose any additional unreported income or other information in order to make the tax return complete. Under these facts and circumstances, Michelle is aware that her $800,000 worth of foreign investments are generating around $30,000 a year in foreign interest income and she has a responsibility/duty to disclose.
Even though Michelle is paying upwards of 38% tax on earnings, she still required to report this information on her tax return, and then claim the foreign tax credit using form 1116.
She is not entitled to exclude the information just because she knows she already paid foreign tax.
What Happens Next?
Once Michelle relays this information to the auditor, chances are the auditor will delve much further into the analysis. The auditor will ask whether her CPA inquired regarding her foreign accounts and/or whether he inquired about any foreign income.
Once Michelle provides the information, along with possibly a copy of the questionnaire (there is no attorney-client privilege with a CPA), the IRS agent will presume that Michelle acted willfully – which she did.
Moreover, due to the willfulness aspect of the nondisclosure, the IRS agent may cease the audit and refer the matter to the Criminal Investigation Department (CID) in order for the special agents of the IRS to conduct a criminal type interview to determine whether Michelle should be prosecuted for Tax Fraud and Tax Evasion.
Are You Already Under Investigation?
Sometimes, our imagination gets the better of us. But sometimes, you may be in your presumption that the IRS has already initiated an investigation-even if they’re not contact you directly. Even before your FBAR is audited, you may already be under IRS Investigation.
It is becoming more and more clear that the IRS, Department of Justice and the U.S. Government as a whole have made Federal Tax Crimes involving Tax Evasion and Tax Fraud that involve Foreign Income and Offshore Accounts a key enforcement priority.
Typical IRS Criminal Tax Investigations include:
- Offshore Tax Evasion
- Offshore Tax Fraud
- Offshore Money Laundering
- Offshore Structuring
If you committed one of these types of Offshore Tax Crimes and are audited by the IRS, you have to be very careful.
Contacting Your Bank Manager
It is safe to say the IRS would have no legitimate reason for speaking with the manager at the bank that you currently use, unless the IRS is trying to build a case against you.
Otherwise, why would the Internal Revenue Service take the time to go visit your bank manager? Oftentimes, when the IRS agent visits your bank manager, it is to begin comprehensive research on issues such as transfers, moving money offshore, and other matters related to your bank account.
They may want to know how often you come to the bank, and how often you request cash as opposed to other transfers. They may also want to know if there any other non-primary individuals on the account, accessing your information and if there are other accounts that the IRS may not know about yet.
Showing up at Your Home, Unannounced
When a person is not cooperating with the IRS, or consistently avoids appearing before the IRS, the IRS can get frustrated. One way the IRS relieves its frustration is by visiting by a person’s residence to try to put pressure on them.
This can be done for two main reasons: The first reason is to put some pressure on the individual to let them know that the IRS is aware of where person lives and that the situation is not going away so quickly. Second, is so the IRS can monitor how the person reacts after the IRS appears at their home. For example, as a result of the IRS visiting their home unannounced, in a person begins making significant transitions or transfers of money from one location or account to another – it may help the IRS pursue a criminal investigation.
Showing up at your Employment or Place of Business
This is a little more intense, and is usually not protocol unless a person owns their own business. We have had many clients tell us, in the pre-criminal investigation phase that the IRS showed up at their place of business to ask themselves – and other employees – various questions.
Of course, other individuals at the place of employment not required to speak to the IRS if they are not under subpoena or summons. Nevertheless, oftentimes people are so scared that when the IRS approaches, that they feel like they have to answer the question — and do. The employees mistakenly believe that by simply answering the questions it will make it go away – usually, the reverse happens and it just gives the IRS more ammunition to go after you.
Sudden Stopping of Communication From the IRS
If you are ever in an audit and the audit ends, but you are unable to obtain a closing letter or any other documentation from the IRS it may be cause for concern. That is because when a civil audit is stopped either abruptly (or with a little more tact), before it seems like the audit is complete, it is because the IRS agent believes there is a criminal issues
In a civil situation, the IRS is absolutely prohibited from asking further questions. That is because in a criminal setting, a person has a right against self-incrimination. A civil audit is not a criminal investigation, and therefore the agent does not have the right to ask criminal type questions.
Interviewing your CPA
If the IRS believes the CPA has information regarding a potential criminal tax matter, the IRS will send them a summons and bring their own “court reporter” with them to a question-and-answer session.
While the CPA has the right to counsel, it is important to understand that if the IRS is taking these types of actions against people on your behalf, then chances are the IRS is at least trying to put together all the evidence he can to determine whether there may be a criminal issue at play.
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 all 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
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.