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2018 FBAR Audits Set to Increase | IRS FBAR Audit Lawyer & Attorney

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2018 FBAR audits are set to increase at a dramatic pace. In this article, I would like to discuss what the FBAR audits are and why 2017-2018 will be the period of time when we believe that the FBAR audits will gain as a percentage of the overall IRS audits compared to earlier years.

2018 FBAR Audits and Sherayzen Law Office Predictions

As early as 2011, Sherayzen Law Office predicted that the FBAR audits would become more commonplace than ever a few years after FATCA was implemented. Once FATCA was implemented in July of 2014, we confirmed our prediction and refined it to specifically identify 2017 and 2018 FBAR audits as the years of larger than average increases. Obviously, the increase in FBAR audits will go hand in hand with the jump in FBAR litigation by the US Department of Justice.

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2018 FBAR Audits: How Do FBAR Audits Differ from Regular IRS Audits?

The public is generally familiar to a certain degree with regular IRS Audits of US tax returns. In general, in a regular audit, the IRS contacts the taxpayer or his representative and conducts a thorough review of the taxpayer’s tax returns selected for examination.

So, are FBAR Audits different from the regular US tax return audits? The answer is: “yes” and “no”. In terms of the actual procedure (i.e. the IRS contacting the taxpayer and the taxpayer’s representative and doing a thorough examination), there are no large differences, though, the fact that FBARs come under Title 31 does affect certain procedures.

However, in terms of issues involved, the FBAR audits can be vastly different, because they would involve not only the issues that are a concern during a regular IRS audit of a tax return, but also FBAR-specific issues. In other words, the FBAR audit will likely involve all of the features of the audit concerning US tax returns (especially, with respect to verification that all foreign income was properly disclosed) and FBAR -specific issues concerning the accuracy of the reported foreign account and foreign income information.

Moreover, it should be remembered that FBAR has a draconian penalty system. Hence, the stakes in the FBAR audit are much higher than those of a regular IRS audit.

Finally, FBAR audits may often lead to FATCA compliance issues, particularly Form 8938 compliance. FBAR audits may also trigger the audit of other information returns, including Form 3520 with respect to foreign gifts and inheritance.

Thus, while FBAR audits may seem procedurally similar to regular IRS audits (though, as I had pointed out above, this similarity is superficial to a large degree), the scope of the FBAR audit, the issues involved, the “expansion” effect and the stakes involved (in terms of potential penalties) make FBAR audits far more dangerous to US taxpayers than regular IRS audits of US tax returns.

Why Should We Expect to See An Increase in 2017 and 2018 FBAR Audits?

The increase in 2017 and 2018 FBAR audits is driven primarily by FATCA and other automatic information exchange mechanisms (including those provided for in bilateral treaties). Since the UBS case in 2008, the IRS has seen a steady increase of data inflow from overseas concerning foreign accounts owned and/or controlled by US taxpayers.

This stream of data became a torrential river after the implementation of FATCA in 2014 and the increase in the bilateral and multilateral automatic information exchange mechanisms since 2011. In fact, the IRS has received so much data that it has not even been able to properly process and organize it yet.

However, even with the small percentage of the data that was actually properly processed, the IRS received a treasure trove of information concerning unreported foreign accounts and noncompliant US taxpayers. This new data has already led to a steady increase of IRS investigations during the years 2015-2016. Given the fact that a much larger amount of data will be processed in 2017 and 2018, the number of IRS investigations and FBAR audits should increase dramatically in 2017-2019.

An indirect confirmation of this conclusion is the recent surge in the US Department of Justice FBAR litigation. We fully expect the FBAR audits to follow the same path of intensification in 2017-2019.

What Should You Do If the IRS Selects You for FBAR Audit?

If the IRS contacts you concerning examination of your FBARs or your US tax returns with Forms 8938 and/or foreign income, you should contact Sherayzen Law Office for professional help as soon as possible. Our firm specializes in helping taxpayers like you with the IRS audits of any US international information returns, including FBARs and Forms 8938.

The owner of Sherayzen Law Office, Mr. Eugene Sherayzen, is an international tax attorney with an almost unique experience of helping US taxpayers at all stages of US international tax compliance: annual compliance, offshore voluntary disclosures, FBAR Audits and FBAR litigation in federal courts. This experience has allowed Mr. Sherayzen to have a unique perspective on FBAR Audits which allows him to be a highly effective advocate of his clients’ positions before the IRS.

Contact Us Today to Schedule Your Confidential Consultation!

IRS FBAR Audits Caused by Tax Returns | FBAR Audit Lawyer

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IRS FBAR Audits can lead to catastrophic consequences for noncompliant US taxpayers. While there may be a numbers of factors that influence the IRS decision to commence such an audit, one of the leading sources of the IRS FBAR Audits are the US tax returns. In this article, I would like to explore the main types of documents that the IRS is searching for during a tax return examination in order to uncover the information that may lead to the commencement of IRS FBAR Audits (I will not discuss here the right of the IRS to disclose US tax return information for Title 31 FBAR Audit; this topic is reserved for a subsequent article).

IRS FBAR Audits and IRS Title 26 Examinations

From the outset, it should be made clear that filing of US tax returns does not automatically lead to IRS FBAR Audits. Rather, a great percentage of the IRS FBAR Audits arise from the IRS Title 26 Examinations of these returns– i.e. IRS examinations and audits of US tax returns pursuant to the various provisions of the Internal Revenue Code. During these examinations, the IRS analyzes the audited tax returns and may uncover information related to FBAR non-compliance which usually serves as a cause of the subsequent FBAR audit.

Tax Return Information that May Trigger IRS FBAR Audits

So, what kind of evidence is the IRS looking for that may trigger IRS FBAR audits? First and most logical is Schedule B, particularly looking at whether box in Part III (which has questions related to foreign accounts and foreign trusts) is checked. If there is a discrepancy between the information provided to the IRS and Schedule B, this may lead to IRS FBAR Audits.

Second, foreign income documents from the tax examination administrative case file (which includes the Revenue Agent Reports). Here, the IRS is looking for income related to foreign bank and financial accounts that was not reported. A combination of unreported foreign income and undisclosed foreign accounts is precisely the toxic mix that lays the foundation for IRS FBAR Audits.

Third (and this is a very interesting strategy), copies of tax returns for at least three years before the opening of the offshore account and for all years after the account was opened, to show if a significant drop in reportable income occurred after the account was opened. The analysis of the returns for three years before the opening of the account would give the examiner a better idea of what the taxpayer might have typically reported as income before the foreign account was opened. This strategy shows just how analytical and creative the IRS can be in looking for cases that should be subject to IRS FBAR Audits.

Fourth, copies of any prior Revenue Agent Reports that may show a history of noncompliance. This strategy confirms once again the notion that a large history of noncompliance may lead to more frequent IRS examinations, including IRS FBAR Audits.

Fifth, IRS is also looking into “cash accounting’ – two sets of cash T accounts (a reconciliation of the taxpayer’s sources and uses of funds) with one set showing any unreported income in foreign accounts that was identified during the examination and the second set excluding the unreported income in foreign accounts.

Finally, the IRS makes a connection between tax fraud and FBAR noncompliance – the IRS is looking at any documents that would support fraud in commencing IRS FBAR Audits. Such documents include: false explanations regarding understated or omitted income, large discrepancies between actual and reported deductions of income, concealment of income sources, numerous errors which are all in the taxpayer’s favor, fictitious records or other deceptions, large omissions of certain types of income (personal service income, specific items of income, gambling winnings, or illegal income), false deductions, false exemptions, false credits, failure to keep or furnish records, incomplete information given to the return preparer regarding a fraudulent scheme, large and frequent cash dealings that may or may not be common to the taxpayer’s business, and verbal misrepresentations of the facts and circumstances.

Of course, the IRS is not limited to these six types of tax return documents; however, this is the most common evidence that the IRS uncovers during a tax return examination that may lead to subsequent IRS FBAR Audits.

Contact Sherayzen Law Office for Legal Help with IRS FBAR Audits

If you are subject to an IRS FBAR Audit or a tax return examination that involves foreign assets and foreign income, or you have undisclosed foreign assets and you are looking for a way to bring your legal situation into compliance with US tax laws, then contact the international tax law firm of Sherayzen Law Office, Ltd. Sherayzen Law Office is one of the best law firms in the world dedicated to helping US taxpayers with foreign assets and foreign income. Our highly experienced team of tax professionals, headed by an international tax attorney Eugene Sherayzen, provides effective, knowledgeable and reliable legal and tax help to its clients throughout the world, and we can help you deal with any IRS problem.

Contact Us Today to Schedule Your Confidential Consultation!

Sarshar Guilty Plea & Undisclosed Israeli Bank Accounts | FBAR Lawyer

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On August 1, 2016, the IRS scored another victory in a case involving Israeli Bank Accounts; the IRS and the DOJ announced that Mr. Masud Sarshar, a California businessman, was charged with one count of conspiracy to defraud the United States and one count of corruptly endeavoring to impair and impede the due administration of the internal revenue laws. Mr. Sarshar already signed a plea agreement agreeing to plead guilty and pay more than $8.3 million in restitution to the IRS. If the court accepts the parties’ agreement, Mr. Sarshar will be sentenced to 24 months in prison. Additionally, Mr. Sarshar agreed to pay a civil FBAR penalty in the amount of 50 percent of the high balance of his undeclared accounts for failure to disclose his Israeli bank accounts.

Facts of the Sarshar Case

Mr. Sarshar owned and operated Apparel Limited Inc., a clothing design business. Under his plea, he admitted that, between 2006 and 2009, he used unreported bank accounts at Bank Leumi and two other Israeli banks to hide $21 million of business revenue from the IRS. The accounts were owned by him personally and in the name of entities that he created with assistance of at least two relationship managers at the Israeli banks.

Between 2007 and 2012, Mr. Sarshar also earned more than $2.5 million in interest income from these accounts; none of this income was reported on his individual and corporate tax returns. No FBARs were ever filed.

In order to use the funds on his accounts, Mr. Sarshar utilized a creative stratagem where Bank Leumi would loan funds to Mr. Sarshar through its U.S. branch while the funds in Israel were used as a collateral. Mr. Sarshar was able to bring back to the United States approximately $19 million of his offshore assets without creating a paper trail or otherwise disclosing the existence of the offshore accounts to U.S. authorities.

What is particularly surprising about this case is the creativity of the Israeli bankers in getting the information to Mr. Sarshar. At Mr. Sarshar’s request, none of the banks sent him account statements by mail; rather, they provided them to him in person in Los Angeles. In order to conceal the statements, a Bank Leumi banker would upload the account statements on a USB drive which she concealed in necklace worn during her U.S. trips. Sometimes, the meetings with bankers occurred in Mr. Sarshar’s car. Moreover, the Israeli bankers also advised Mr. Sarshar to obtain Israeli and Iranian passports to prevent him from being flagged as a U.S. citizen by the compliance departments at both banks.

Lessons of the Sarshar Case

Several lessons and conclusions can be drawn from this case. The first conclusion is that the IRS continues to focus on Israeli banks in its tax enforcement efforts. The focus on Israel is something that Sherayzen Law Office has repeatedly stated in the past. Again, we want to repeat our prediction that we will see more cases involving Israel and other countries outside of Switzerland. This means that, if you have undeclared bank accounts in Israel, you are at an increased risk of detection and prosecution by the IRS. This lesson can be expanded into a general statement that you run a high risk of getting caught by the IRS if you have undisclosed foreign accounts in any country that has implemented FATCA.

The second lesson that can be drawn from the Sarshar case is that he should have entered into a voluntary disclosure program while he had a chance to do it. It is very important to understand that, in a willful situation, using the IRS offshore voluntary disclosure program is indispensable to prevent the imposition of higher penalties and a criminal prosecution.

The third lesson is that Sarshar case reaffirms the most common fact pattern that leads to IRS criminal prosecution – willful divergence of U.S. earnings to overseas accounts to avoid taxation, the usage of entities to hide the ownership of foreign accounts and persistence in violation of U.S. laws. Even one of these factors might have been sufficient for the IRS to commence a criminal investigation; in this case, all three were present.

Contact Sherayzen Law Office if You Have Undisclosed Foreign Accounts in Israel or Any Other Country

If you have undisclosed foreign accounts in Israel or any other country, contact Sherayzen Law Office for legal help. Our experienced team of international tax professionals, headed by our founder and international tax attorney Eugene Sherayzen, can help you resolve all of your tax problems in the United States.

Contact Us Today to Schedule Your Confidential Consultation!