IRS Audit and Unfiled FBAR’s: Is all lost?

by Sanford Millar

While tens of thousands of taxpayers have entered the offshore voluntary disclosure process many more have not. The reasons for not filing voluntary disclosures are not important, what is important is what happens if a taxpayer receives an audit notice. Some audits will be triggered by information reported to the IRS from foreign financial institutions responding to requests from the U.S. government and some will be for other reasons. The reason may influence the initial document request but ultimately the risk on examination are serious. The risks range from civil assessment and penalties to criminal referral and possible prosecution. How the taxpayer responds during the audit is therefore critical.

First, it is important to recognize that if the taxpayer has unreported foreign financial accounts a decision to come forward early in the audit process is important to potential penalty mitigation. Second, because of the potential for criminal referral taxpayers must be aware that their conversations with accountants may not be privileged. Third, past information provided to the accountant may be subject to production (such as client information organizers) by way of Grand Jury subpoena. Taxpayers should also expect that their accountant will be interviewd by the agent. Fourth, the accountant can be compelled to testify. Fifth, because of the “required records doctrine” taxpayers can be compelled to testify in Grand Jury proceeding without benefit of Fifth Amendment protections against self-incrimination. The parade of horrible outcomes could be devastating if the wrong approach is taken early in the audit process.

If there is non-willful conduct in failing to file a Report of Foreign Bank Account (FBAR), then the taxpayer should consider coming forward to the agent at the beginning of the audit process and offering up the information necessary to establish FBAR compliance and reporting of previously unreported income. A reasonable cause explanation should also be considered and if established may result in no FBAR penalty. More complex approaches are necessary if the failure to file FBAR’s was knowing and intentional (“willful”). At that point the taxpayer still needs to produce records in response to Information Document Requests (IDR’s) submitted by the Revenue Agent (auditor). Coming forward may still be warranted, but under no circumstances should the taxpayer attempt to hide information, or conceal account records, for doing so can result in a criminal referral and charges of “obstruction”. Some hope that they will simply not be discovered.

As to the hope for non-discovery, many taxpayers will find themselves receiving letters from their offshore financial institutions requiring proof of FBAR compliance. Taxpayers must assume that failure to respond will or responding falsely will not help. The information will be turned over to the IRS. The fact that a taxpayer has not yet received a letter from their foreign financial institutions should not be interpreted as a safe from information turnover. Some foreign financial institutions will cooperate with the IRS under undisclosed agreements. Ultimately the account information will be released by offshore financial institutions to the IRS for all U.S. taxpayers.

The important point to remember is that upon receipt of an audit notice, a taxpayer with undisclosed foreign financial accountants needs to develop an audit strategy in a privileged context, with skilled counsel in order to avoid what could be very serious, lengthy and expensive tax and FBAR litigation.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

Written by:

Sanford Millar

Law Offices of Sanford I. Millar on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.