Foreign Nationals & Expats
Houston Tax Attorney
IRS Audits of Streamlined Applications
A question that’s asked by every client 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.
This sounds like an audit, but it really isn’t. When you submit tax returns under the streamlined procedures, you must include a Certification by U.S. Person Residing in the United States
for Streamlined Foreign Offshore Procedures, Form 14653 or Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, Form 14654.
IRS could verify the information you provide on the Certification, but that doesn’t mean they’re auditing the tax return. The IRS may cross-check the information on the certification with information from other sources. They may check that the information is consistent with your FBARs filed through BSA. They could contact any financial advisors that you list on your certification, which is why you should not list financial advisors on the Certification unless you actually relied on them.
(2) they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return.
This means your tax return is processed and assigned a Discriminant Inventory Function (DIF) score. All tax returns, including streamlined returns, are scored through a computer program called DIF. Certain tax filers, such as those with Schedule C or EITC, for instance, automatically have higher DIF scores and therefore a higher chance of getting audited. Additionally, any tax returns that appear to have “large, unusual, or questionable” (LUQ) deductions or expenses may cause the return to be flagged for an audit.
So what the IRS is stating is that your return will not be flagged for audit just because you submit under the streamlined procedures. However, if something on the tax return itself is an audit trigger (such as large or unusual deductions), you may be subject to an audit as with any other tax return.
Drafting Form 14653 and 14654
The certification of non-willful conduct is a crucial part of your application. The narrative on your certification should be concise, but not too short or it will be considered incomplete and rejected. The IRS is looking for troublesome facts such as:
- Accounts held in the name of offshore entities (which could show an intent to disguise ownership)
- Accounts identified by code names, nicknames, or numbers
- Illegal source funds
- Accounts located in tax havens
(note: the above factors are not exclusive)
To ensure the IRS has confidence that such facts are not present in your case, your certification should be complete by answering the following questions:
- What is your personal and financial background?
- What is the source of the funds in your foreign accounts? (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 will go through without a hitch. Thus far, we have had no rejections or audits of our streamlined filings. We address the questions thoroughly and carefully counsel those with sufficient exposure to willfulness penalties to consider the OVDP program instead.
Your attorney must also sign off on your Certification which carries a great deal of malpractice liability for the attorney. I do not take these submissions lightly.