IRS Report of Foreign Bank and Financial Accounts (FBAR) Audits

Introduction: FBAR Audits

This article will discuss the reasons why the IRS may conduct an FBAR audit and will give an overview of the audit process. If you are a US taxpayer and you have any accounts in foreign countries, you need to be aware of the requirements for filing the FBAR. If you are being audited for your FBAR filings, The McGuire Law Firm can help. Contact us for help with an FBAR Audit or other tax issue.

 

Does the IRS audit people or entities for their Report of Foreign Bank and Financial Accounts (FBAR) Form 114 compliance?

 

Yes they do! The IRS will audit a person or entity for their FBAR compliance. In many respects that audit is like any other audit where the IRS is looking for substantiation.

 

How does the IRS determine who they will audit for FBAR compliance?

 

The answer to the question is relatively mysterious outside of the IRS, but it seems like the IRS has a reason to audit as opposed to an FBAR audit being perfectly random. In our experience, it seems as though something has raised a question in the eye of the IRS with respect to an FBAR. Here are a few reasons the IRS might conduct an FBAR audit:

 

• Perhaps the IRS is conducting a standard income tax audit and the question about foreign bank account reporting comes up. Assuming there is reason to dig deeper, the IRS may conduct an audit. Case law points to this being an outcome.
• In the case where a person has marked an FBAR question “No” on their form 1040 (Schedule B questions), 1065 (Schedule B questions), 1041 (Other Information) and then the person has actually filed an FBAR, the IRS may audit the FBAR.
• In the case where a person or entity files an FBAR in one year, but not the following year, the IRS may audit the FBAR.

 

Keep in mind this is a speculative list of reasons and there could be any number of other reasons the IRS may choose to pursue an audit, but it generally seems there is something that kicks off the audit. If there are any auditors out there reading this and want to provide some insight, we welcome the feedback!

 

What happens when the IRS audits a taxpayer for FBAR compliance?

 

IRS Initial contact:

 

In a recent example of an FBAR audit we assisted with, the taxpayer was contacted by the IRS through Department of the Treasury Internal Revenue Service Small Business/Self Employed – BSA group. The taxpayer was sent a 6639 letter (as outlined in IRM 4.26.17).

 

This initial letter advises the taxpayer that “You’ve been selected for a Report of Foreign Bank and Financial Accounts (FBAR) examination.”

 

The letter advises the taxpayer to call the IRS agent listed to discuss:

• FinCEN Form 114, Report of Foreign Bank and Financial Accounts, (FBAR) filings, 
• Types of documents you will be asked to provide,
• The examination process, and
• Any concerns or questions you may have.

 

Appointing a representative to assist with the FBAR audit:

 

Even at this early stage in the process you should consider hiring an attorney to be the point of contact with the IRS to help through the audit process.  When you hire an attorney, you should appoint them as representative by filing a Form 2848 authorizing the party to discuss the matter with the IRS. The 2848 should be completed by filling in Line 3, “Acts Authorized” as follows:

 

• For “Description of Matter” – enter “Matters relating to Report of Foreign Bank and Financial Accounts” or “FBAR examination”
• For “Tax Form Number” – enter “FinCEN Form 114”
• For “Year(s) or Periods(s)” – enter the calendar years you are authorizing.

 

The Information Document Request:

 

After the initial discussion with the IRS examiner, the IRS will likely issue an Information Document Request (IDR). A recent IDR our client received made the following document requests:

 

For the XXXX calendar year:

 

1. Copies of all offshore financial account statements reflecting all account activity for each of the years mentioned above. This includes all accounts in which you consider yourself an owner or co-owner and which you had Signature or Other Authority, and/or over which You Exercised Control during the years mentioned above.
2. Produce all financial statements prepared by you, for you, or on your behalf for any purpose.
3. Complete copies, for my records, of previously filed Report of Foreign Bank and Financial Accounts (FBAR) for foreign accounts maintained during calendar years XXXW & XXXY.
4. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, please provide documentation showing that all income earned by the accounts was properly reported for income tax purposes.
5. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, please provide documentation showing that you properly notified the Commissioner of the Internal Revenue Service on your annual tax return that you had a financial interest in said foreign account.
6. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX that were owned, controlled, or otherwise titled in the name of a foreign entity, please provide documentation showing that all international information returns (i.e. Forms 5471, 8865, 3520-A, etc.) were properly filed for such foreign financial entity.
7. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, and for which you also had a FATCA Form 8938 reporting requirement, please provide all documentation showing that you properly complied with your FATCA reporting requirements.
8. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, please provide documentation showing that the funds used to open the account(s) were properly reported as income to the Commissioner of the Internal Revenue Service. To the extent the funds were non-taxable, such as a gift, please provide all documents showing that the funds were properly reported to the Commissioner of the Internal Revenue Service (such as on Forms 3520), as applicable.

 

As you can see, the request is fairly expansive and covers more than just the FBAR. Gathering the documentation requested can take a lot of time depending on the number of accounts and the taxpayer facts. Certainly, not every question is always applicable.

 

Taxpayer Interview:

 

After submission of the documentation, the examiner may request an interview with the taxpayer, either in person, or a remote (online) meeting may also be allowable.

 

The interview is another thorough set of questions for the taxpayer covering a number of topics. While the questions of the interview are likely specific to each taxpayer, you can expect questions covering the following topics:

 

• Detailed questions about the taxpayer (and spouse as applicable) inquiring:
  • Where the taxpayer lives or visits,
  • Which passports the taxpayer has,
  • How much time do you spend abroad and for what reason,
  • Details on your educational background,
  • Details on your profession or job,
  • Information about other assets you may own such as real estate and safe-deposit boxes,
  • How financial affairs are managed by you and/or your spouse (if applicable),
  • If you are using any non-US credit cards, and/or
  • Who are the other members of your immediate family?

 

• Detailed information about your foreign accounts including 
  • Details about why the account was opened, 
  • When the account was opened, 
  • How the account was opened, 
  • Who has access to the account, 
  • and, the purposes of the account.

 

• Questions about the FBAR filed
  • Has the FBAR been amended?
  • How was the FBAR prepared?
  • Did you research FBAR filing requirements, if so what kind of research?
  • What steps were taken to file the FBAR?

 

• Information about your tax return preparer (if you used one)
  • How do you communicate with your tax preparer?
  • Do you consider them just a preparer or also an advisor?
  • Do you pay for anything besides tax preparation, such as tax advice?
  • How long have you used this tax preparer?
  • What did you believe the tax preparer’s qualifications were?
  • Did you research the tax preparer prior to hiring your tax preparer?
  • Do you receive a tax organizer or questionnaire from the preparer?
  • Did you fill out the organizer/questionnaire?
  • Did they explain 8938 filing requirements?
  • Did they ask about foreign bank accounts?
  • Did you disclose to them that you had foreign financial accounts?

 

Like other audits, the IRS can be very thorough and is looking for lots of detail.

 

After the interview, the IRS may issue additional document requests and may expand the audit to additional tax years, as has been our experience.

 

Post Interview and additional IDR steps:

 

At this point, the IRS should be done collecting information from the taxpayer, unless, of course, they have reason to make additional requests. 

 

The IRS should have enough information at this point to make a determination about the audit and can issue their audit report detailing their findings and any consequential action.

 

Overview:

 

While distilled to a few pages here, the audit can take several months to complete, depending on the issues found and reported. The documentation requests can be onerous as well, as it can be challenging to access data from prior years with non-US institutions. The audit can even feel invasive. 

 

A good tax attorney should be able to help you through the audit process and manage the relevant disclosures through the audit process and advise on potential outcomes. The consequences and implications of the answers given in the audit can lead to significant penalties if the taxpayer is found to have willfully failed to file their FBAR or not filed accurate FBARs. The audit is designed to help the IRS assess the taxpayer filing shortcomings and dictate any penalty action.

If you have been selected for an FBAR audit, contact one of our tax attorneys at The McGuire Law Firm to discuss how we can help.