FBAR Audit: IRS Foreign Account Noncompliance Exam Process & Triggers

FBAR Audit

FBAR Audit: Examinations on the Rise

FBAR Examination Audits on the Rise: When a US person is under audit or examination for noncompliance with the reporting of foreign accounts, there is a lot at stake. That is because the sheer magnitude of potential penalties can be extreme — and completely disconnected from the violation itself. There are many different ways in which a person may become subject to an FBAR audit. Some of the more common catalysts for an IRS audit include:

• Examination of other tax matters
• Voluntary Disclosure/Streamlined Audit
• 3^rd Party provides your information to the IRS (audit or whistleblower)

In recent years, the IRS has significantly increased the enforcement of FBAR-related matters, including the initiation of FBAR audits and examinations.

Let’s review the basics of an FBAR Audit:

What Sparked the FBAR Audit?

It is important to understand how the IRS learned about your foreign accounts in order to set the tone for how you will prepare your response. For example, are you an international consultant who has foreign accounts in several different countries in order to maintain local currency? Alternatively, did you inherit an account from family members abroad — or did you previously reside overseas and maintain one or several accounts? This will help set the tone for your response to the FBAR Audit Examination.

Why Are You Under Audit?

Oftentimes, a person finds themselves under audit because of a mistake on a tax return or a perceived error that the IRS wants to further examine. As in the example above, possibly you may have some foreign income and foreign accounts from your own business and those institutions reported to the IRS by way of FATCA.

In other situations, a taxpayer may be under audit because they made a proactive Voluntary Disclosure (and an FBAR audit is part of the routine submission procedure). Alternatively, a person may have made a Streamlined Submission and is now under audit regarding the disclosure of their accounts.

Are You Willful or Non-Willful?

Another common issue will be whether or not the IRS Examiner or Revenue Agent believes that you are willful or non-willful. The IRS agent will ask several questions surrounding the noncompliance. If the Agent determined that you are non-willful, then it will not lead to any sort of criminal investigation. If on the other hand, the Agent or examiner believes you may be willful — they will generally conduct a deeper dive into the foreign accounts noncompliance.

Do You Have Foreign Account Bank or Institution Records?

The Taxpayer’s response may hinge on the type of account and the institutions location. For example, if you are in the United Kingdom, Australia or India — obtaining bank documents may not be that big of deal. If instead, you have a small local bank in Thailand that utilizes a passbook system only — it may be much more difficult to obtain that information.

Foreign Language Translation for the FBAR Audit

Most of the time, you will be required to translate the information into English. Some Agents will require that you obtain a certified or professional translation, while less formal Agents will simply request that you do your best to Google translate and then they will review it accordingly.

IRS Agents Have Discretion in Audit for FBAR

While being on the receiving end of an FBAR audit can be a scary undertaking — it is by no means the end of the line. While the initial penalty is oftentimes the maximum penalty allowed for the type of violation, it is important to keep in mind that the IRS Agents do have discretion to mitigate the penalties.

Meet our International Tax Law Specialist Team

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure and FBAR reporting compliance.

Contact our firm today for assistance.