{"id":8562,"date":"2017-01-08T09:00:18","date_gmt":"2017-01-08T14:00:18","guid":{"rendered":"http:\/\/www.escapeartist.com\/?p=8562"},"modified":"2020-09-18T06:47:15","modified_gmt":"2020-09-18T11:47:15","slug":"will-offshore-bank-account-increase-chances-audited","status":"publish","type":"post","link":"https:\/\/www.escapeartist.com\/blog\/will-offshore-bank-account-increase-chances-audited\/","title":{"rendered":"Will an offshore bank account increase my chances of being audited?"},"content":{"rendered":"

The number one question I get from Americans considering opening an offshore bank account or forming an international corporation is, \u201cwill this increase my audit risk?\u201d<\/span><\/p>\n

The answer is simple: No, it makes little to no difference <\/span><\/p>\n

So long as you keep your account in compliance by filing the required forms, an offshore bank account or structure will have a de minimis impact on your risk of being audited by the IRS. <\/span><\/p>\n

The reason an offshore bank account doesn\u2019t change your audit risk is two fold: <\/span><\/p>\n

First, 95% of your probability of being audited is based on your income. If you make less than $200,000, your risk is low. If you earn more than $1 million, your risks are relatively high. I\u2019ll get into specifics below. <\/span><\/p>\n

Second, since FATCA, offshore banks are reporting to the IRS much like U.S. banks. The IRS computers will compare this data with what you report. So long as they match, your audit risk is minimal. <\/span><\/p>\n

If you sell stocks in the U.S. and don\u2019t report them on your return, you\u2019ll get a notice from the IRS. If you have a foreign bank account and don\u2019t report it on Schedule B of Form 1040 and on your FBAR, you\u2019ll get a notice from the IRS. <\/span><\/p>\n

The big difference here is the cost of non-compliance, not an increased risk of being audited. <\/b><\/p>\n

If you get caught failing to report a domestic stock sale, the cost is 25% of the unpaid tax plus interest. If you missed a $1,000 gain, the cost is $250. <\/span><\/p>\n

However, the penalty for failing to file an FBAR is $10,000 per year. If you also failed to report a corporation, you could be looking at a minimum penalty of $20,000. <\/span><\/p>\n

Again, the risks associated with an offshore bank account aren\u2019t an increase in your chances of being audited. The real exposure lies in your failing to keep up with your filing requirements. <\/span><\/p>\n

Let\u2019s get to the numbers. Will an offshore bank account increase my chances of being audited?<\/span><\/p>\n

Less than 1% of personal returns are audited by the IRS each year. Of course, many of these are low income or W-2 wage earners. Their chances of being audited are minimal. <\/span><\/p>\n

As an expat or international investor, you\u2019re presumably in a higher income bracket. Thus you do have some risk of an audit. But that risk is based on your income and not your offshore holdings. <\/span><\/p>\n

If you earn between $25,000 and $199,999, your chances of being audited are less than 0.8%. Earn between $200,000 and $499,999 and your risk goes up to 1.75%.<\/span>
\n<\/span>
\n<\/span>The more you make, the higher your chance of having the pleasure of meeting the IRS. Those with incomes over $10 million have more than a 16% chance of an audit. <\/span><\/p>\n

If you have a business and report zero net profit, your risk of audit is 5 to 7% depending on a variety of factors (such as whether you took an auto or home office deduction). Basically, anyone reporting their business on Schedule C is at a higher risk of audit.<\/span><\/p>\n

In fact, a small business in the U.S., reported on Schedule C, will have a significantly higher risk of audit than an offshore business reported on Form 5471. <\/span><\/p>\n

This assumes you\u2019re not doing anything to draw attention to yourself. Just like a U.S. business, if your offshore corporation loses money each year, the IRS will want to know why. But, this increased risk of an audit is caused by your reporting, not the fact that you have an offshore bank account. <\/span><\/p>\n

Here\u2019s a table that will help you identify your risk of being audited: <\/span><\/p>\n

 <\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Returns by Income<\/b><\/td>\nPercent of Tax Returns<\/b><\/p>\n

Audited in 2014<\/b><\/td>\n<\/tr>\n

All returns<\/span><\/td>\n0.86%<\/span><\/td>\n<\/tr>\n
No adjusted gross income<\/span><\/td>\n5.26%<\/span><\/td>\n<\/tr>\n
$1 to $24,999<\/span><\/td>\n0.93%<\/span><\/td>\n<\/tr>\n
$25,000 to $49,999<\/span><\/td>\n0.54%<\/span><\/td>\n<\/tr>\n
$50,000 to $74,999<\/span><\/td>\n0.53%<\/span><\/td>\n<\/tr>\n
$75,000 to $99,999<\/span><\/td>\n0.52%<\/span><\/td>\n<\/tr>\n
$100,000 to $199,999<\/span><\/td>\n0.65%<\/span><\/td>\n<\/tr>\n
$200,000 to $499,999<\/span><\/td>\n1.75%<\/span><\/td>\n<\/tr>\n
$500,000 to $1 million<\/span><\/td>\n3.62%<\/span><\/td>\n<\/tr>\n
$1 million to $5 million<\/span><\/td>\n6.21%<\/span><\/td>\n<\/tr>\n
$5 million to $10 million<\/span><\/td>\n10.53%<\/span><\/td>\n<\/tr>\n
Over $10 million<\/span><\/td>\n16.22%<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

If you\u2019re living and working abroad, and have an offshore bank account, the way to lower your audit risk is to reduce the number of red flags your tax return puts up. Here are my tips for avoiding an expat audit: <\/span><\/p>\n