When it comes to dealing with Internal Revenue Service tax audits or examinations, most of the time they are nowhere near as bad as other tax attorneys want to make it seem. Other than taxpayers who find themselves in the direst of situations — such as an IRS special agent standing on their doorstep — Taxpayers probably do not require ’emergency tax law services’ or whatever other nonsense other attorneys are trying to sell them on in response to an audit or examination notice. The IRS audits that tend to be the most intrusive are the ones that are considered high-risk. Oftentimes, high-risk audits are referred to as eggshell or reverse eggshell audits. In the rare situation that the taxpayer finds themselves in an eggshell or reverse eggshell audit, taxpayers must be very careful in how they respond to the IRS agent since these types of audits are high-risk. Taxpayers have to walk a tightrope between not intentionally omitting or misrepresenting facts, while not volunteering superfluous information that was not requested of them. In recent years, the U.S. government has turned its attention to international tax and foreign account and asset reporting-related compliance matters when it comes to its high-risk audit enforcement protocol. Let’s take a look at five types of high-risk foreign tax audits.

Omitted Overseas Income

When a taxpayer intentionally underreports foreign income, this can be a form of tax fraud or tax evasion depending on how much income was underreported, the source of the income, and whether the income was legal or illegally sourced income. Taxpayers who have intentionally unreported income must be careful when responding to any audit notice from the IRS because if the IRS believes the taxpayer acted with intent, it could expand into a criminal tax situation.

Intentionally Failed to Report Foreign Accounts Assets

Taxpayers with foreign accounts, assets, and investments may have various international information reporting forms they may be required to file each year depending on the category of assets they have and the value of the investments abroad. One of the most lethal types of penalties that the IRS can assess is international information reporting penalties for failing to file the FBAR. When the taxpayer is considered willful (including reckless disregard or willful blindness), it could lead to extreme penalties upwards of 50% maximum value of the unreported accounts.

Excluded Certain FBAR/FATCA Reportable Accounts

In addition to failing to file the annual FBAR or Form 8938, the IRS also enforces penalties against taxpayers who intentionally deflate the value of accounts or assets listed on their forms as well as eliminating them (if they do not want the IRS to know about the assets). In this type of situation, taxpayers must be very careful if they file the forms (so that they cannot take the position they were unaware of their filing requirement), but then fail to include certain high-dollar assets. As with other non-compliance issues, if the taxpayer made a mistake (such as not knowing that a foreign pension was reportable), that is usually not a big deal, versus a taxpayer who may have reported several accounts from a foreign financial institution but intentionally failed to include high dollar bank accounts at institutions they thought would not report them to the IRS.

Misrepresenting U.S. Person Status to Foreign Bank

With the introduction of FATCA (Foreign Account Tax Compliance Act), hundreds of thousands of foreign financial institutions report U.S. account holder information to the IRS and U.S. government. Typically, this is when the taxpayer is considered a U.S. person and falsely represents to the foreign financial institution that they are a foreign person instead of a U.S. person for tax purposes — and as a result, they are not included in the account information provided by the Foreign Financial Institution to the IRS. An important distinction is whether it was a mistake or intentional. If the taxpayer mistakenly represented their status to the foreign financial institution, then it would not be considered willful – but if the taxpayer did it intentionally this could lead to willful penalties and a much more intrusive tax audit.

3^rd Party Fraudulent Conveyance

Finally, some taxpayers believe that if they transfer assets out of their name to a third party, to avoid creditors or other issues but then maintain control and decision-making powers over the asset the IRS will not find them. Oftentimes, the IRS has various ways to uncover foreign assets held by an individual who they want to investigate and if the IRS determines that the taxpayer made a fraudulent conveyance, the taxpayer may find themselves on the receiving end of a very intrusive tax audit– which may also now bring in the third party that the taxpayer transferred the assets to.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.