For those of you living and working abroad, or investing outside of the United States, the fact that you file one or more of the offshore company forms and report a foreign bank account on the FBAR will have little to no effect on your chances of an audit. The IRS is focused like a laser on those who fail to report their offshore transactions. So, if you are in compliance, you have little to fear.
To put it another way, individuals who file an offshore return are not currently a target for the IRS. They have amassed their forces to go after the banks and non-compliant individuals because that’s what makes headlines…that’s what brings in the cash.
How much are we talking about you ask? The IRS has brought in about $4 billion through the Voluntary Disclosure Program and another few billion in fines and penalties against Swiss and other banks who helped Americans avoid taxes. These are the kind of numbers the government is going for…they are not concerned with the average person’s compliant offshore dealings.
This is all to say that the IRS is not so concerned with those in compliance. If you have been filing your forms and paying along, you are no more likely to be audited that the average person. If you get in to compliance voluntarily, then you take the target off of your back.
It is also important to realize that the IRS audits less than 1% of taxpayers each year…and their budget for 2014 and 2015 has been cut by Republicans angry about the way their fund raising groups were treated in the last election cycle. Based on the following factors, I believe that most of my clients have a 3% to 5% chance of facing the tax man…not because of international structures, but because of their higher levels of income.
My point here is not that you will never be audited. It is simply that going offshore does not significantly increase your probability of facing down the IRS. For more on this topic, please take a look at my article How to Avoid an IRA Audit – Expat Edition.
If you are behind in your U.S. tax filings, I suggest you take a look at my article on the IRS Voluntary Disclosure program. If you qualify as an Expat, this might be a cost effective avenue for you to get right with the Service.