A question that’s commonly asked by prospective clients in a streamlined compliance filing is: “will I get audited?” This article will hopefully shed some light.
Here’s what the IRS says:
Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.
What exactly does that mean? Let’s break this down into its two parts: (1) the accuracy and completeness may be checked against information received from banks, financial advisors and other sources; and (2) they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return.
(1) the accuracy and completeness may be checked against information received from banks, financial advisors and other sources.
While we do not these other sources are, we know what information the IRS is getting from foreign banks. This includes reporting of SSN and and total asset values for any account holders who are identified as having a U.S. nexus. So in case you’re wondering, it is not a good idea to omit that an account in your streamlined submission.
(2) they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return.
Your return will not be flagged for audit just because you submit under the streamlined procedures. However, you may be subject to an audit as with any other tax return, based on the IRS’s audit selection criteria.
Drafting Form 14653 and Form 14654
The certification of non-willful conduct is an important part of your application.
Unfortunately, the concept of ‘willfulness’ for FBAR penalty purposes is about as clear as mud. It is an evolving standard and which has been interpreted differently in various courts.
Drafting the narrative is not so much a science as it is an art. There are no magic words. By keeping up with new FBAR litigation, practitioners can identify common patterns and trends to carefully draft a narrative along the following principles:
- Keeping the discussion concise.
- Being mindful of the statutes of limitations.
- Keeping the reader attuned to the ‘bigger picture’.
To ensure that the IRS has confidence that you are not willful, your certification should answer the following questions:
- What is your personal and financial background?
- What is the source of the funds in your foreign accounts? (foreign inheritance, foreign wages, etc?)
- Did you have personal or business reasons for opening the foreign accounts?
- What type of contacts did you have with the foreign accounts?
If your answers to the above questions are not things that indicate willfulness, then your streamlined application should go through without a hitch.
We can’t say for sure how common audits are but only that we have had no audits of our streamlined filings. If client tells us they are non-willful but the facts don’t quite support it, we will not take the risk.
You don’t need to keep looking over your shoulder after making a truthful and complete streamlined submission. If you’re non-willful, have now paid your taxes and penalties under the streamlined program, it’s time for you to move on with your life.
Should you include facts that might be viewed as negative?
This is a very individualized issue, and you should go with your attorney’s recommendation.
You should include any major “bad facts” that the IRS could discover in an audit. Even though streamlined audits are rare, you don’t want to leave things to chance.
Facts are always open for interpretation. The non-willfulness certification is your chance to disclose any major “bad facts” and paint them in a light that is most favorable to you. Disclosing such facts after an audit might not be as effective.
At the same time, you don’t want to build the government’s case for them. You should never make a false statement of fact on your certification.
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.