FBAR Violations: In recent years the US government and specifically the Internal Revenue Service have made the enforcement of foreign accounts compliance a key priority. Several recent court rulings have sided with the US government on issues involving penalties and willfulness. The extent of penalties that can be issued for FBAR violations vary based on each Taxpayer’s facts and circumstances. What makes fighting FBAR penalties so complicated is that the taxpayer cannot just go to Tax Court to try to dispute the penalty. Since the FBAR is used to report foreign Bank and financial accounts and not to report tax — Tax Court is not an option. This is also why responding timely to an FBAR Audit or FBAR Penalty Violation notice is crucial.
5 Examples of FBAR Violation Investigations
The Internal Revenue Service has several methods to try to discover your noncompliance with FBAR reporting and filing. Let’s take a look at 5 common examples of how the IRS can find you:
FATCA is The Foreign Account Tax Compliance Act. More than 110 have signed FATCA agreements with the United States. As a result of these agreements foreign financial institutions routinely submit information to the US government detailing which one of their account holders are US persons.
The bank may also send the taxpayer a FATCA Letter.
Once the IRS has this information, they are able to confirm whether a taxpayer has been compliant or not with FBAR reporting.
This may also lead the taxpayer to get embroiled in a reverse eggshell audit in which the IRS has information regarding the noncompliance but has not informed the taxpayer.
Rather, the IRS issues an examination notice and tries to catch the taxpayer in a lie.
Inconsistent FBAR Filing
Since the FBAR is not part of a tax return filing or included in most tax software programs, many taxpayers may simply forget to file the form in some years.
While these are just innocent mistakes, from an IRS/FinCEN standpoint it may reflect inconsistent filing which may result in a further inquiry, examination, audit and/or penalties.
Taxpayer Audit for Non-FBAR Violations
Sometimes a taxpayer is audited for reasons that have nothing to do with foreign accounts — but it leads to an FBAR investigation anyway.
For example, if a Taxpayer is being audited for their consulting business, and the IRS realizes the taxpayer has income generated from overseas, it may cause the IRS agent to inquire further about foreign accounts and assets.
3rd Party Voluntary Disclosure
Let’s say a Taxpayer has foreign accounts with a current spouse, and the taxpayer never disclosed the accounts on the FBAR.
The couple divorces, and when the other spouse goes to a new tax preparer, she learns that she should have been filing FBARs in prior years.
This leads the spouse to submit to one of the offshore voluntary disclosure programs, and on the FBAR identifies her former spouse as a joint owner — at least for the years of the compliance, which is usually six years.
International Wire Transfer Audit
This is becoming more commonplace as the economy becomes more global. When foreign money is transferred into the U.S., it may “ding” the bank and result in communications from the bank to the IRS — leading to an international wire transfer audit.
In conclusion, in recent years the IRS has significantly increased enforcement of FBAR filing. The failure to comply with foreign account compliance reporting requirements may lead to an FBAR audit, examination an investigation – and/or FBAR penalties.
These penalties can oftentimes be avoided or reduced through FBAR amnesty procedures.
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