U.S. taxpayers are required to disclose offshore income and assets to the Internal Revenue Service (IRS) by filing an electronic tax document known as an FBAR (Foreign Bank Account Report), officially titled FinCEN Form 114. In addition, taxpayers with FBAR obligations are typically required to file Form 8938 (Statement of Specified Foreign Financial Assets) where an account balance exceeds $50,000. However, noncompliance with these requirements is widespread. In some cases, the noncompliance can easily be perceived by the taxing authorities as part of an attempt at tax evasion where accompanies by unreported taxable foreign income while in others, the failure to disclose results from a sincere misunderstanding of the taxpayer’s duties. In the latter scenario, the taxpayer may be eligible for relief by utilizing the IRS Streamlined Domestic Offshore Procedures. However, while these procedures can mitigate penalties, they can also come with drawbacks, such as the risk of a subsequent tax audit. Because the streamlined procedures do not offer protection from criminal prosecution, such audits can pose grave danger. Thus, it is critical for the taxpayer – and his or her tax attorney – to be amply prepared.
The Streamlined Domestic Procedures are similar to, but should not be confused with, the Offshore Voluntary Disclosure Program (OVDP), which is ending this September. Both programs give noncompliant taxpayers an opportunity to reduce their penalties by voluntarily disclosing previously unreported foreign income, assets, or financial accounts and by providing an avenue to submit previously omitted foreign information reporting. However, there are two crucial differences between the Streamlined Procedures and the OVDP, which represent potential hazards for the taxpayer:
Viewing these two facts side-by-side, one can immediately see how the Streamlined Domestic Procedures could pose legal dangers for taxpayers who are unable to provide detailed, accurate, and compelling explanations of their decision-making processes or where badges of fraud are part of their fact pattern. This danger has only been heightened by the IRS’ recent shift toward increased auditing of streamlined submissions.
As is true of other tax documents, there is no guarantee that a streamlined submission (or the associated amended delinquent returns) will be selected for IRS examination. However, if the taxpayer is chosen for an audit, and the auditor is not thoroughly satisfied that the taxpayer’s conduct was indeed non-willful as certified on Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures), the taxpayer could be facing an embarrassing and stressful IRS criminal tax investigation, dramatically increased civil or fraud penalties, and worst of all, the possibility of incarceration in federal prison. Remember: participating taxpayers must certify their non-willfulness under penalty of perjury, giving prosecutors a foothold should the taxpayer misrepresent or conceal any information requested by the IRS during the audit.
While streamlined submission audits can be dangerous for taxpayers, they also provide opportunities to establish credibility and demonstrate non-willfulness. Of course, these opportunities can only be seized if they are understood by the taxpayer, making it essential for taxpayers to be educated on what to expect from streamlined submission audits.
For example, taxpayers who are being audited should be prepared to undergo detailed questioning, which will occur during one or more interviews with the auditor. Similar to the trustee in a bankruptcy case, the auditor’s objective is to verify that the taxpayer is being truthful, has furnished all requested documents, and acted non-willfully as certified. Several people may be present at this interview, such as the court reporter tasked with recording the taxpayer’s testimony. The auditor will ask the taxpayer questions about his or her tax preparation methods, level of involvement in the tax preparation process, and what sort of information or documents the taxpayer gave his or her tax preparer. For example: why did the taxpayer decide not to notify their tax preparer of the foreign income?
In short, an audit is a double-edged sword with the capacity to make or break a taxpayer’s case, depending on how thoroughly he or she has prepared for the examination. Working with an experienced tax attorney, who will be able to advise the taxpayer on what to expect and how to respond at all stages of the audit process, gives the taxpayer the greatest likelihood of emerging with minimal damage. Depending on the details of the situation, a tax lawyer may advise an alternative approach to resolving the issue, such as filing a delinquent FBAR or participating in the OVDP – while there’s still time, that is.
For more information, readers may be interested in referring to our tax articles on:
Unfortunately, as of mid-2018, the IRS has issued minimal guidance as to its procedures for selecting streamlined submissions for auditing, leaving taxpayers largely in the dark. However, while it is difficult to know if you are at risk for being audited, it is easy to obtain peace of mind that your offshore tax issue will be in skilled hands.
At the Tax Law Office of David W. Klasing, we have extensive experience assisting taxpayers and business entities with FBAR audits, FBAR criminal investigations, the OVDP, streamlined disclosures, domestic streamlined disclosures, and other international tax law issues. Whether you are concerned about a previous failure to report foreign bank accounts, or you have questions about the disclosure requirements that apply to you, our knowledgeable and zealous team of tax professionals is here to help. For a reduced-rate consultation, contact our tax firm online or call the Tax Law Office of David W. Klasing at (800) 861-1295 to get started.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
Helpful Q and A libraries: