How FBAR Investigations are Handled by the US Government

FBAR Investigations & the IRS

FBAR Investigations

FBAR Investigations: The FBAR refers to Foreign Bank and Financial Account Reporting — which US Taxpayers report annually on FinCEN Form 114 to the Federal Government. The Internal Revenue Service is tasked with enforcement of foreign accounts compliance and accurate reporting of foreign accounts, assets, investments and income is an enforcement priority for the US Government. The IRS is aggressively enforcing compliance with U.S. tax rules and foreign accounts compliance. On the reporting side, the main priorities are foreign accounts, assets and investments. When it comes to foreign income the Internal Revenue Service is prioritizing income generated from foreign businesses, gifts, inheritances, mutual funds, and other passive investments. The IRS is authorized to issue fines and penalties for non-compliance — and may even initiate a criminal investigation. To combat these penalties, the IRS has also develop tax amnesty programs such as FBAR and FATCA amnesty.  The tax amnesty programs are collectively referred to as voluntary disclosure.

We will summarize the basics of how FBAR investigations are handled.

What is an FBAR Investigation?

An FBAR Investigation occurs when an individual, trust, or entity fails to properly file an annual FBAR (Foreign Bank Account Reporting Form, aka Report of Foreign Bank and Financial Account Form) aka (FinCEN 114) — and the IRS launches an examination, audit or investigation of the matter

Penalties stemming from an FBAR Investigation range from a civil penalty warning letter in lieu of penalty, all the way to criminal penalties.

Example of an FBAR Investigation

Michael is originally from India and first came to the United States in 2008 on an H-1B visa.

He has numerous accounts and assets in India. 

In early 2009, Michael was at a dinner party with friends when he 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.

Thus, if Michael 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 until 2010, with enforcement in 2014, there have been laws on the books requiring the disclosure of foreign accounts for many years.  In fact, FBAR reporting dates back to the 1970s. Therefore, just because your CPA or Accountant may have just learned about FATCA, you still had a reporting requirement under many other different U.S. tax laws.  In other words, just because FATCA is new, does not make offshore reporting new as well.

The Tax Professional Knows Less Than Michael

When Michael went to see his tax preparer for the first time, the taxpayer 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. This does not absolve Micheal or his CPA from an FBAR Investigation (or resulting penalties).

Myth 2 – 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.

The 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.  In fact, the IRS has made offshore enforcement a key priority, and the exceedingly high penalties are reflective of the IRS’ goal of catching and penalizing individuals.

When it’s time to file next year’s tax returns, Michael’s CPA sends Michael a questionnaire 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), 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. Aside from making intentional misrepresentations to a tax professional there is the inverse, which is knowingly omitting key information from a tax professional. 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 (aka Willful Omission)

Thus, the tax preparer is under false pretenses that Michael does not have any foreign accounts or foreign income, which is why Michael 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 he is under Audit by the Internal Revenue Service. This was Michael’s first notice that an FBAR Investigation is pending against 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.

The FBAR Investigation includes 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.

There is No Attorney-Client Privilege with the CPA

We understand individuals make decisions about tax preparation/disclosure in-part based on the fees charged by the tax professional. And, the fees charged by a non-attorney are typically less expensive than an attorney.

But that comes at a cost, and with a risk.

The risk being that the IRS may subpoena the CPA for any documents or other information provided by Michael to the CPA, or by the CPA to Michael.  

This is a big hurdle for Michael, because now the IRS will learn that the CPA sent Michael a questionnaire that specifically asked whether Michael had foreign accounts, and Michael received it, but did not complete it. 

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm for assistance with getting compliant.