Have you been reporting foreign bank accounts? The government is cracking down, and FBAR audits are on the rise. Learn how to stay ahead of the game and be fully prepared for an FBAR audit.
What is an FBAR audit?
An FBAR audit is an IRS review of a U.S. person’s FBAR filing. FinCEN is a bureau of the U.S. Department of the Treasury responsible for ensuring that U.S. persons disclose their offshore accounts and assets.
FinCEN Form 114, also known as the Foreign Bank Account Report (FBAR), is required for United States citizens, residents, and entities to report their foreign financial accounts.
The FBAR collects information about financial accounts held outside the United States to help combat tax evasion and other financial crimes.
Individuals and entities with a financial interest in or signature authority over one or more foreign financial accounts with an aggregate value of $10,000 or more during the calendar year must file an FBAR.
However, failure to file an FBAR can result in significant FBAR penalties.
It’s not uncommon for a person to be subject to a tax audit due to an error on their FBAR or a perceived issue.
What triggers an FBAR audit?
There’s no set trigger for an FBAR audit, but some common reasons include the following:
- Random Selection: FinCEN may choose tax filers randomly to verify compliance.
- Discrepancies: Inconsistencies or errors in offshore tax forms—not just the FBAR, but also FATCA, IRS Form 3520, or other forms—may lead to an audit.
- High-Risk Industries: People in industries with higher risk, such as real estate or crypto, may face a higher chance of being audited.
- Referral: FinCEN may receive a tip or referral from another government agency or financial institution indicating noncompliance with FBAR guidelines.
- Previous Audits: If a person has been audited before and had compliance issues, they may face a higher chance of being audited again.
To avoid triggering an FBAR audit and potential penalties for noncompliance, it’s crucial to keep accurate records and follow FBAR guidelines. See our blog post for additional IRS audit triggers.
What happens during an FBAR audit?
During an FBAR audit, FinCEN reviews your FBAR filing and may request additional documentation or information to ensure compliance with FBAR requirements if necessary.
Letter 4265, also known as the FBAR Appointment Letter, notifies taxpayers about scheduling an FBAR audit or examination.
While the number of warning letters has declined, the number of IRS FBAR audits has significantly increased over the past few years.
If you receive Letter 4265 from the IRS, they have identified that you may still need to file this form or may have filed it incorrectly.
Taking this letter seriously is important because failure to comply with FBAR requirements can result in significant penalties. However, if you take action in response to Letter 4265, you can avoid or mitigate these penalties.
Check out our blog post for tips on what to do if you get audited.
How can I prepare for an FBAR audit?
To prepare for an FBAR audit, you should keep accurate records and documentation of your foreign financial accounts and any transactions involving them.
You should also be familiar with FBAR reporting requirements and clearly understand which of your foreign financial holdings must be reported.
We strongly recommend consulting with an experienced FBAR attorney to help you avoid a potential tax audit or criminal tax investigation.
How long does an FBAR audit take?
The duration of an FBAR audit varies, but it usually lasts several months. FinCEN sets a deadline of 180 days from the date of receipt of the FBAR filing to complete the audit.
However, if the person undergoing the audit must provide additional documentation or information, the audit may extend beyond this deadline.
What is the FBAR statute of limitations?
The FBAR statute of limitations is 6 years. This is how long the government can typically impose civil penalties for FBAR violations.
The clock starts ticking on the due date of the FBAR report, after which the government has up to 6 years to assess civil penalties.
However, it is important to note that the FBAR statute of limitations for violations may be longer than 6 years and can extend to as much as 10 years from the date of the violation, especially when tax fraud is suspected.
To minimize the risk of enforcement action, make sure you comply with all international tax requirements and maintain accurate records and documentation of foreign financial accounts.
What are the consequences of failing an FBAR audit?
Failing an FBAR audit may result in penalties, including fines and, in the worst-case scenario, criminal charges. The amount of the fine may depend on the severity of the noncompliance or the determination of willful or negligent noncompliance.
What are FBAR penalties?
Although FinCEN regulates FBAR filing, the IRS can enforce FBAR penalties for filing late or not filing at all. The severity of penalties depends on whether your failure to file was willful or non-willful.
- You can receive an FBAR penalty for any of the following reasons:
- Not filing an FBAR when it was required
- Filing an FBAR but omitting one or more required accounts
- Filing an FBAR with inaccurate account values
- FBAR penalties can be civil or criminal
Penalties are harsher if the IRS deems your actions willful (intentional).
Non-willful vs. willful FBAR penalties
A non-willful violation refers to a failure to file an FBAR due to ignorance of the requirement or a mistake. In cases of non-willful violation, the maximum penalty is $10,000 per violation.
A willful violation, on the other hand, refers to a conscious and intentional disregard of the FBAR filing requirement.
In cases of a willful violation, the maximum penalty is $100,000 or 50% of the balance in the foreign accounts at the time of the violation, whichever is greater.
In more severe cases, a willful violation can also result in criminal tax consequences, including additional fines and imprisonment.
How to avoid an FBAR audit
To help avoid an FBAR audit, make sure you file all necessary forms on time. In addition to the FBAR, there are other offshore tax forms that may need to be filed depending on your specific situation, including FATCA Form 8938.
Additionally, if a US person receives a gift or inheritance from a foreign person or transfers cryptocurrency to a foreign trust or estate, they may need to report these transactions on Form 3520, which is also subject to IRS audit.
Filing these forms accurately and on time can help ensure compliance with IRS regulations and reduce the likelihood of triggering an audit.
It’s also important to keep accurate records and report all income and assets as required by law. By staying organized and proactive, individuals can minimize their risk of an FBAR audit and potential penalties for non-compliance.
Do you qualify for an FBAR amnesty program?
There are multiple options available to reduce However, once an FBAR audit has started, you will not be able to qualify for the FBAR amnesty programs.
If you didn’t know about your FBAR filing requirements or can otherwise show you acted non-willfully, you may qualify for an FBAR amnesty program and avoid harsh penalties.
If you filed the FBAR on time but made a mistake or forgot to include important information, you can request an FBAR amendment.
The FBAR amnesty program is designed to encourage US taxpayers who have failed to file FBARs to come forward and voluntarily disclose their previously unreported foreign bank accounts to the IRS.
The IRS will decide if you acted willfully or non-willfully to determine which program you qualify for. Taxpayers who acted non-willfully are eligible for the following programs:
- Delinquent FBAR Submission Procedures
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
If you didn’t file and your actions were willful, you should call an FBAR lawyer immediately to discuss your options.
You may also be able to use the Voluntary Disclosure Program. While there are no guarantees, this program typically allows you to avoid criminal charges in exchange for paying IRS penalties.
We make FBAR filing easy!
Are you concerned about potential noncompliance with FBAR reporting? Don’t risk facing costly FBAR penalties and additional consequences.
Our skilled and experienced FBAR attorneys can help you navigate the FBAR audit process with confidence.
Don’t wait until it’s too late. Schedule your consultation today and put your mind at ease knowing your FBAR audit is in capable hands.
