Government Watchdog Says FBAR Database Lacks Quality Controls
When the IRS singles you out for an audit or FBAR investigation, you assume that the process will have certain controls to be sure things are done properly. But a recent report by the Government Accountability Office, a government watchdog agency, reveals that the FBAR database is missing key quality controls that protect taxpayers and ensure accuracy during the process.
What is the Government Accountability Office?
The U.S. Government Accountability Office (GAO) works for the government to keep an eye on the government. It is known as the “congressional watchdog.” It’s job is to monitor how federal agencies work, measuring their success and efficiency based on objective, reliable information. The GAO provides non-partisan, fact-based information to Congress, agency heads, and the public. When it issues a report, it is usually at the request of a Congressional committee or subcommittee, or because a law requires it. These reports are edited to remove sensitive information before being released to the public.
Stand-Alone FBAR Database Causes Problems for IRS
The GAO evaluated the FBAR database maintained by the IRS as part of an investigation into whistleblower compensation for the Senate Finance Committee. This is a stand-alone database used by FBAR examiners within the Small Business/Self-Employed operating division. It isn’t connected to or accessible by other offices within the IRS. This isolation was one of many problems the GAO found with the FBAR Database.
As of February 9, 2018, the IRS Whistleblower Office is required to award individuals who report undisclosed foreign financial accounts compensation based on the amount of FBAR penalties imposed. The problem is that the Whistleblower Office doesn’t have access to the FBAR Database. To do their job, the whistleblower team has to rely on manually-written reports from the FBAR team about the amount of the penalties imposed and the usefulness of the information communicated by the whistleblowers. This can lead to under-reporting, as well as errors in how the IRS manages its duty to compensate whistleblowers.
Lack of Quality Controls Raises Red Flags for GAO
The GAO wasn’t specifically looking at the reliability of the information within the FBAR database -- it just needed to confirm the records would serve for their fact-based investigation of the whistleblower issue. But the problems with the FBAR database were big enough that the GAO dedicated a substantial portion of its congressional report to the need for improved quality controls.
According to the GAO, the FBAR database, failed to meet the minimum controls required to protect federal information and systems under the Federal Information Security Modernization Act of 2014 (FISMA). The FBAR database:
- Requires employees to manually transcribe information from emails, faxed, or paper forms
- Has no data testing or validation procedures
- Has no secondary check to ensure data was entered correctly or completely
- Only warns users about basic data entry errors and does not prevent their entry
- Includes optional fields which results in incomplete records
- Lacks documentation and instructions for the proper use of the database
The problems with the FBAR database aren’t just internal issues, either. They could result in inconsistent FBAR penalty decisions that could cost taxpayers thousands of dollars in fines and penalties. According to the GAO,
“Because the FBAR data lack some reliability controls, the IRS may rely on insufficient or incomplete data for reporting and decision making, including amounts of whistleblower awards.”
IRS Considers Improvements to FBAR Database
The IRS knows its FBAR database has problems. In 2016, it established an FBAR Improvement Project Team to review the system and make recommendations for its improvements. The team is investigating automating parts of the case file and creating a report automation tool. But none of these improvements have been implemented. When the GAO investigated the database there was no clear plan for when the database would be held to the necessary quality control standards. The GAO is of the opinion that “it may be a low priority for scarce information technology resources.”
As long as the FBAR database contains these quality control issues, it puts taxpayers at risk of faulty decision-making. Until the IRS is able to ensure the data in its files are correct, taxpayers may question the credibility of the information used to impose substantial FBAR penalties. That could make it take longer for taxpayers to get a final answer. It could even mean some will have to take that decision to court over the IRS’s inaccurate FBAR database.