Can the IRS Investigate Foreign Bank Accounts and Assets?
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Can the IRS Investigate Foreign Bank Accounts and Assets?
Many Americans have foreign bank accounts or assets for various reasons – whether they live abroad, have family overseas, or are investing internationally. However, the IRS has strict rules about reporting foreign accounts and income, and failing to follow them can lead to serious penalties.
In this article, we’ll look at the IRS requirements, how they investigate foreign accounts, and what defenses you may have if they inquire about yours.
IRS Reporting Rules
The main reporting requirements for foreign accounts are:
- FBAR: You must file a Report of Foreign Bank and Financial Accounts (FBAR) if your total foreign accounts exceeded $10,000 at any point in the year [1].
- FATCA: Foreign financial institutions must report your accounts to the IRS under the Foreign Account Tax Compliance Act (FATCA) [2].
- Form 8938: You must report foreign assets on Form 8938 if their value exceeds certain thresholds [3].
- Income: You must report all income from foreign accounts on your tax return, even if it was taxed abroad [4].
Failing to file required reports or pay taxes can lead to civil penalties up to $129,000 per violation. Criminal charges are also possible for willful violations [1].
How the IRS Investigates Foreign Accounts
The IRS has several methods to identify unreported foreign accounts, such as:
- Information from foreign banks and governments per tax treaties and agreements like FATCA [5].
- Comparing FBAR/FATCA reports to your tax return for discrepancies [6].
- Data mining large amounts of financial information.
- Following the money trail in audits/investigations.
- Whistleblower reports.
In other words – if you have foreign accounts, it’s very hard to hide them from the IRS nowadays. The penalties for getting caught are severe, so proper reporting is essential.
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Possible Defenses if Investigated
If the IRS inquires about your foreign accounts, here are some possible defenses:
- Lack of willful intent – The IRS must prove you knowingly hid accounts. Mistakes or misunderstandings happen.
- Reliance on tax advisor – Your CPA/attorney gave bad advice. Get written confirmation of their error.
- Dual citizenship – You thought local reporting was sufficient if you pay taxes there.
- Amend returns – File amended returns/FBARs if previously unreported income or accounts.
- Statute of limitations – The IRS inquiry is too late under limitations rules.
An experienced tax attorney can review your situation and build the strongest defense. Don’t ignore an IRS letter – fighting late is better than not at all.
Key Takeaways
- FBAR, FATCA, and other rules require reporting foreign accounts and income.
- The IRS has many methods to identify unreported foreign assets.
- Potential defenses exist like lack of intent or advisor reliance.
- Consult a tax attorney immediately if the IRS inquires about foreign accounts.
Americans with foreign assets must tread carefully to avoid severe IRS penalties. But if you receive an inquiry, an attorney may help defend your case. Full disclosure is generally the best approach when issues surface.