The IRS has several methods to find personal and business bank accounts. With the increase in international business and offshore accounts, the IRS has expanded its reach to uncover hidden assets. Understanding the ways the IRS accesses bank account information can help taxpayers avoid unnecessary penalties and interest.
Reporting by Banks
Banks are required to report certain customer information to the IRS each year. This reporting requirement allows the IRS to match income reported on tax returns to funds flowing through financial institutions.
The main reporting requirements for banks include:
- 1099-INT – Reports interest earned over $10
- 1099-DIV – Reports dividend income over $10
- 1099-B – Reports proceeds from broker and barter transactions
- 1099-MISC – Reports miscellaneous income such as freelance or contractor payments
Banks must provide a 1099 form to the IRS and taxpayer anytime reportable income exceeds the minimum thresholds. The IRS computers match the information provided by the banks to amounts reported on filed tax returns. Any discrepancies or unreported income will automatically generate an IRS notice to the taxpayer.
The IRS also receives information on certain foreign accounts. US citizens are required to report worldwide income on their US tax return. Under the Bank Secrecy Act, foreign banks must report US owned accounts over $10,000 to the US Treasury. This information is accessible by the IRS to uncover offshore tax evasion.
Information Sharing with Other Agencies
Various government agencies share information with the IRS to improve compliance with tax laws. Access to data on financial accounts ensures the IRS can verify taxpayers report all taxable income.
Some of the information supplied by other agencies includes:
- State programs – Unemployment benefits, lottery/gambling winnings
- Federal programs – Social Security, VA benefits, federal contracts
- HUD – Real estate sales and rental income
- Justice Department – Information on criminal tax cases
These agencies provide 1099 forms, match notices, and other documentation to validate income reporting to the IRS. Discrepancies between information supplied and amounts on a tax return trigger IRS correspondence for explanation or tax adjustments.
Summons Authority
The IRS has the power to legally summons banks, credit unions, and financial institutions for information on specific taxpayers. A summons requires the third party to provide documentation on accounts, transactions, and other data requested by the IRS.
Some common reasons the IRS uses summons authority include:
- Obtain records for an audit
- Unpaid payroll taxes – Summons bank for business accounts
- Verify deposits and withdrawals – Audit technique for unreported income
- Validate income reporting for suspected tax evasion
The bank must comply with the summons request or challenge it in court. The IRS cannot request information without reasonable cause. However, once issued most financial institutions will provide the data to avoid legal action.
John Doe Summons
A John Doe summons allows the IRS to obtain information on a group of unnamed taxpayers. The IRS must demonstrate probable cause that specific individuals used an institution to avoid tax responsibilities.
Some instances where John Doe summons occur:
- Offshore banks and tax havens – Identify US citizens evading taxes
- Merchant accounts – Match credit card sales to business tax returns
- Payment processors – Validate contractor/freelancer income reporting
The John Doe summons must be approved by a federal judge prior to issuance. Financial institutions are required to provide data on accounts and transactions meeting the IRS request parameters.
Currency Transaction Reports
Banks must file a currency transaction report (CTR) for cash deposits, withdrawals, or exchanges over $10,000. Structuring payments under $10,000 to avoid CTR filings is an illegal practice that can lead to civil and criminal penalties.
The Treasury Department receives over 15 million CTRs per year. This data helps identify suspicious transactions and uncover potential tax evasion or other illegal activities. The Financial Crimes Enforcement Network (FinCEN) provides CTR information to the IRS and other law enforcement agencies.
FBAR & FATCA Reporting
Two important laws require reporting on foreign financial accounts and offshore assets to the IRS:
- FBAR – Foreign bank account reports for accounts over $10,000
- FATCA – Foreign account tax compliance act punishes non compliance
US citizens must file FBAR reports on foreign bank accounts exceeding $10,000 at any time during the year. FATCA requires disclosure of foreign assets on forms 8938 for foreign income or Form 8965 for foreign gifts/inheritances.
Non-compliance with FBAR and FATCA carries stiff penalties up to 50% of account balances. The data provides the IRS with information on offshore accounts and international assets which may create US tax liabilities.
Whistleblowers
The IRS whistleblower program rewards informants up to 30% of collected proceeds for high dollar tax cases. Many rewards relate to undisclosed foreign accounts, fraudulent tax shelters, and substantial underreporting of income.
Whistleblowers provide detailed information on financial accounts, transactions, and other data that allows the IRS to pursue tax cheats. Major data breaches like Panama Papers and Swiss Leaks also feed authorities information on global tax evasion.
Tax Information Exchange Agreements
The US has tax treaties and Tax Information Exchange Agreements (TIEAs) with many foreign governments. These agreements require cooperation and exchange of financial information between countries.
TIEAs allow the IRS to request data on US taxpayers with accounts in foreign jurisdictions. The agreements continue to multiply as countries pledge greater transparency. TIEAs make it harder for US taxpayers to hide money offshore.
IRS Audits
IRS agents have broad authority to examine the finances of any taxpayer. Audits aim to validate reported income, deductions, credits and other return information.
During an audit, IRS agents can request any books, records, or other documentation. This includes personal and business bank account statements, deposit slips, cancelled checks, and loan records. Failing to provide the requested bank records could result in immediate tax assessment without further verification.
Business returns have even higher audit rates. IRS agents routinely verify gross receipts by examining bank deposits, purchases, and other transactions. Audits of business tax returns will include a detailed review of corporate and personal bank records.
IRS Collections
When taxpayers fail to pay outstanding tax debts, the IRS collections division swings into high gear. Collection officers can legally seize assets, garnish wages, and extract funds from bank accounts.
The IRS will issue levies against any bank accounts in the taxpayer’s name. Specific information regarding account numbers or location is generally not required. IRS levies require banks to freeze accounts and remit the funds requested to pay off tax debts.
Taxpayers subject to IRS collection action will receive several notices demanding payment before enforced collection measures. Ignoring the IRS rarely makes tax debts disappear. Proactive resolution is the best approach.
Conclusion
The IRS has broad legal authority to obtain bank account information during examinations and collection actions. Taxpayers attempting to conceal income in hidden accounts should understand the IRS frequently uncovers these tactics.
Staying current on all tax filing and reporting requirements is the surest way to avoid unnecessary IRS scrutiny. Being transparent provides peace of mind and eliminates the need to look over your shoulder.
Table of IRS Bank Information Reporting
| Reporting Type | Required by | Reportable Amount |
|---|---|---|
| 1099-INT | Banks | Over $10 interest |
| 1099-DIV | Banks | Over $10 dividends |
| FBAR | Individuals | Foreign accounts over $10,000 |
| FATCA Form 8938 | Individuals | Foreign assets meet threshold |
| CTR | Banks | Cash transactions over $10,000 |
Methods for IRS Access to Bank Records
The IRS can legally obtain bank account records through the following methods:
- Required reporting by banks
- Information sharing with government agencies
- Summons authority
- John Doe summons
- Whistleblower reports
- Tax treaties and TIEAs
- Business and individual audits
- Collection actions and levies
Taxpayers should understand the extensive resources the IRS can leverage to uncover undisclosed accounts and unreported funds. Maintaining financial transparency is the key to avoiding adverse tax consequences.
FBAR Reporting Requirements
The IRS mandates strict reporting requirements on foreign bank accounts exceeding $10,000. Taxpayers with foreign accounts must comply with these rules:
- File FBAR by April 15 each tax year
- Retain records supporting account balances and transactions
- Report maximum account value at any time during year
- Include joint accounts with spouse or others
- All foreign accounts even if owned separately
Non-compliance with FBAR rules carries stiff civil and criminal penalties. Negligent failures can draw fines up to $500,000. Willful violations may result in penalties equal 50% of account balances each year.
Using Offshore Accounts to Avoid Taxes
Some taxpayers attempt to evade taxes using complex offshore schemes:
- Hide income in foreign accounts or assets
- Underreport foreign investment/passive income
- Claim false foreign tax credits
- Fake foreign trusts, corporations, etc.
- Expatriation to avoid US tax liabilities
These tactics carry big risks. The IRS Whistleblower Office pays big rewards for reporting offshore tax evasion. The agency uses sophisticated tools to uncover non-compliance.
For taxpayers considering offshore strategies, legal compliance is strongly advised. The IRS crackdown on foreign accounts continues at full force. Red flags include:
- FBAR or FATCA non-filing
- Omission of foreign income
- Inconsistent fund transfers
- Unreported gifts/loans from offshore entities
Failure to correct offshore reporting issues may result in severe IRS penalties. Proactive measures are recommended to avoid malicious prosecution. Filing amended returns to report offshore information may mitigate penalties.
Reasons for IRS Summons on Bank Records
The IRS uses summons authority to compel banks and third parties to produce records. Reasons for bank summons include:
- Audit unreported income
- Validate deductions or credits
- Review flow-through business income
- Verify tax basis reporting
- Check deposits vs. return income
- Confirm payment of taxes withheld
Summons enforcement remains an important IRS tool to verify taxpayer compliance. The easiest way to avoid problems is ensuring complete transparency on tax returns.
Using IRS Whistleblower Program
The IRS Whistleblower Office rewards reporting of tax fraud. Awards apply to tax, penalties, and interest over $2 million. Whistleblowers can report:
- Unreported income in domestic or offshore accounts
- Employment tax evasion exceeding $2 million
- Sham trusts, entities, or deductions
- Transfer pricing manipulation
- Kickback schemes
Awards range from 15%-30% of collected proceeds. The IRS protects informant identity and privacy. Submissions should include extensive detail on the tax violation and related banking activities.
Whistleblower tips remain a key data source for IRS enforcement. In fiscal year 2022, whistleblower reporting has driven over $1 billion in federal tax collections.
Using IRS Amnesty Programs
Taxpayers concerned about potential non-compliance with foreign account reporting can consider the following IRS amnesty programs:
- Streamlined Filing Compliance – Taxpayers residing abroad catch up on delinquent filings by amending the last 3 years of returns and reporting foreign income. No penalties apply.
- IRS Offshore Voluntary Disclosure – Domestic taxpayers disclose previously unreported foreign income and file FBAR reports. Reduced penalties compared to audit results.
- Delinquent FBAR Submission – File late FBARs with explanation of reasonable cause. IRS may waive penalties.
- Delinquent International Information Return – File late Forms 3520, 5471, etc and request penalty relief.
These programs allow taxpayers to correct international reporting omissions in a compliant manner. The IRS provides guidance on eligibility for reducing penalties. Consultation with a tax professional is advised before deciding on amnesty options. The IRS cracks down hard on taxpayers continuing to conceal foreign assets. Timely corrective action is prudent.
Reporting Cryptocurrency Accounts
The IRS treats cryptocurrencies like bitcoin as property for tax purposes. This means:
- Trading cryptocurrency triggers capital gains/losses
- Income received in cryptocurrency is taxable
- Mining cryptocurrency creates self-employment income
- Transactions in cryptocurrency over $10,000 must be reported on FBAR/FATCA forms
Many exchanges allow users to store cryptocurrency online in digital wallets. These accounts must be reported like offshore bank accounts if balances exceed $10,000.
The IRS is increasing enforcement on unreported cryptocurrency transactions. In 2019, the agency sent letters to 10,000+ taxpayers suspected of owing crypto-related taxes. Failing to report cryptocurrency accounts or transactions can lead to audits, penalties, or criminal prosecution.