US taxpayers with foreign accounts at increased risk of audits

It is not uncommon, or illegal, to have foreign bank accounts. However, there are situations where United States tax law requires taxpayers to report the presence of these accounts to the Internal Revenue Service (IRS). 

But what happens if a taxpayer fails to report this asset? Those who do not report the accounts are likely to receive notification from two different sources: the foreign institution holding the account and the IRS.

A letter from your bank. It is likely the foreign institution will send you a letter to let you know about its requirement to comply with the rules of the Foreign Account Tax Compliance Act (FATCA). This United States tax law requires foreign banks to provide information about United States taxpayers that hold accounts within their institutions.

You may wonder why a foreign bank would report this information. Banks that choose not to comply with this requirement can face harsh financial penalties from the U.S. while those who comply can continue operations with U.S. citizens without penalty. This carrot or the stick method of operation has encouraged compliance.

A letter from the IRS. It is also possible the IRS will become aware of the account and conduct an audit. This could lead to allegations of tax evasion which can come with a five-year prison sentence and up to $250,000 in fines. The government can list a separate criminal charge for each individual year a taxpayer fails to report the account. As such, the penalties accumulate quickly.

It is wise to take a proactive approach whether you are looking to come into compliance with tax laws or under investigation by the IRS. An attorney experienced in FATCA compliance can review your situation and provide legal counsel that will better ensure your rights are protected.

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