What’s Your Audit Risk? It Depends!
Taxpayers who are considering one of the Streamline Procedures (Non-resident or Resident) have been advised by the IRS that their returns are subject to the regular audit selection process even though they must identify their returns with a red stamp on the top of the front page of the returns as being submitted under the Streamline Procedure. Often taxpayers, particularly those who are dual nationals or permanent residents (Green Card holders) are skeptical about the IRS’s statement and believe that they are much more likely to be audited, but there is no evidence that is the case.
Taxpayers who qualify for one of the Streamline Procedures should not be intimidated by audit risks. So long as the taxpayer meets all the criteria to make the certification of non-willful conduct, the audit rick is a non-factor. The factors are whether the taxpayer was negligent, made a mistake of fact or law or reasonably relied on legal advice from a practitioner provided all the facts and skilled in the practice area. A streamline filing made on one or more of these ground s should be certified in examination as a good filing.
The benefit of a Streamline filing is that the penalty for failing to timely file a Report of Foreign Financial Account (FBAR) is zero for a Non-resident (someone who live outside the U.S for 330 days in a twelve month period) to five percent (5%) of the highest year- end balance for the preceding six years. Amended returns are required for the prior three (3) years and a Certification of non-willfulness is also required.
For taxpayers who use file using the Streamline Procedure only to avoid the higher Offshore Voluntary Disclosure Program (OVDP) penalty of 27.5% -50% (for “Bad ” banks) playing the ‘audit lottery” may seem a risk worth taking. But, that risk must be evaluated in context of an adverse result. If the taxpayer is audited and the auditor determines that the non-willful certification was materially false, or the amended returns falsely understate income, the taxpayer risks criminal prosecution and multiple penalties for willful failure to file an FBAR and false tax returns. Too often taxpayers think only of the short terms cash flow and gamble on the long terms audit risk.
