Overview

U.S. taxpayers with foreign financial accounts and assets face two distinct—but increasingly connected—reporting systems: FBAR (FinCEN Form 114) and FATCA (reports by foreign financial institutions plus U.S. taxpayer Form 8938). The IRS and Treasury use information received from these channels, plus other U.S. information returns, to match reported income, identify inconsistencies, and pursue compliance. This article explains how that matching works, what triggers notices, typical penalties, and practical steps to resolve discrepancies.

Sources referenced: IRS and Treasury guidance on FBAR and FATCA (see IRS FBAR and FATCA pages and FinCEN guidance) IRS FBAR page, IRS FATCA page, FinCEN BSA E-Filing.

Two reporting streams: who reports what

  • FBAR (FinCEN Form 114). U.S. persons must electronically file FinCEN Form 114 if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year. FBARs are filed to FinCEN via the BSA E-Filing System, not directly to the IRS, though FinCEN shares FBAR data with the IRS for tax administration and enforcement (FinCEN/ Treasury guidance).

  • FATCA. There are two FATCA-related flows. First, foreign financial institutions (FFIs) identify and report U.S.-owned accounts under FATCA rules—either directly to the IRS or to their local tax authority under an Intergovernmental Agreement (IGA). Second, certain U.S. taxpayers must report specified foreign financial assets on IRS Form 8938 as part of their tax return when thresholds are met. FATCA reporting provides account-level information to U.S. tax authorities that can be matched against U.S. returns.

Both streams feed structured data: account balances, account holders, identifying details, and sometimes income paid (interest, dividends). The IRS combines these feeds with domestic information returns (Forms 1099, 1042‑S, W‑2, Forms 5471/8865/3520/8621, etc.) to look for inconsistencies.

How the IRS actually matches the data

  1. Data intake and normalization
  • FFIs transmit FATCA data in standardized XML formats. FinCEN receives FBAR filings electronically. The Treasury and IRS normalize these files into searchable records.
  1. Identifier matching
  • The matching engine looks for unique identifiers—Taxpayer Identification Numbers (TINs)/Social Security Numbers, names, account numbers, dates of birth, and U.S. addresses. Where direct identifiers are missing or partial, probabilistic matching (fuzzy matching) links likely matches using name, date of birth, and country of residence.
  1. Cross-checks against U.S. tax returns and information returns
  • The IRS compares amounts reported on Form 1040 and attachments (Schedule B interest/dividends, Schedule C, Forms 5471/8865 for foreign entities, Form 8938 for specified foreign assets) against FATCA and FBAR records and against third-party information returns (1099s, 1042‑S). Large discrepancies—unreported foreign interest, dividends, or account balances inconsistent with Form 8938 or Schedule B—generate flags.
  1. Risk scoring and prioritization
  • Cases are prioritized by risk (size of unreported assets, repeated mismatches, patterns suggesting willful concealment). High-risk cases may be routed to examination or Criminal Investigation; lower-risk cases may generate a routine notice (for example, a proposed adjustment under the CP2000 process).
  1. Human review and enforcement
  • Data matches produce leads. IRS examiners review, and if needed, they issue information requests, notices, or open an audit. If the taxpayer can explain/report the discrepancy with reasonable documentation, many cases are resolved administratively.

Common triggers that lead to a match or audit

  • FATCA reports show accounts tied to a U.S. taxpayer but the taxpayer did not report related income (interest, dividends, or distributions) on their Form 1040.
  • An FBAR/FinCEN filing shows large aggregate balances that are inconsistent with the taxpayer’s reported income or reported foreign-asset disclosures (Form 8938, schedules, or required entity returns).
  • Third-party returns (1099s, 1042‑S, brokerage statements) show foreign-source income not reflected on the tax return.
  • Repeated filing errors, missing Forms 5471/8865/3520/8621, or use of nominee accounts that obscure beneficial ownership.

In my practice, the most common matching trigger I see is a FATCA-generated account report paired with tax-return Schedule B omissions—clients often forget to report foreign interest and dividend amounts that FFIs have already reported to the IRS.

Typical IRS notices and what they mean

  • CP2000 / Notice of Proposed Adjustment: This is common when third-party data doesn’t match a return. It proposes additional tax due and explains how the IRS calculated the difference.
  • Information Document Request (IDR) or audit letter: A formal request for documentation supporting foreign accounts and income.
  • Letter 1058/Letter 616? (varies): The IRS uses multiple letter series; the meaning depends on the letter. Regardless, treat any IRS notice seriously and respond within the deadline.

Responding promptly with bank statements, account transcripts, and amended returns (if needed) reduces the chance of escalated enforcement.

Penalties and potential outcomes

  • FBAR penalties: FBARs are civil penalties enforced through FinCEN and the IRS. Non-willful FBAR failures have historically resulted in penalties up to several thousand dollars per violation, while willful violations can trigger penalties up to the greater of $100,000 or 50% of the account’s balance for each violation—and potential criminal exposure. (See FinCEN and IRS FBAR guidance.)

  • FATCA/Form 8938 penalties: Failure to file Form 8938 can trigger an initial civil penalty (historically $10,000), plus additional penalties and potential accuracy-related penalties if the underlying income is underreported. (See IRS Form 8938 instructions.)

  • Tax and interest: Unreported foreign income leads to additional tax, interest, and possible accuracy-related penalties under IRC sections 6662 (20% or 40% in certain cases).

  • Criminal referral: In cases of willful tax evasion or concealment, the matter may be referred to Criminal Investigation for prosecution.

Authoritative guidance is available from the IRS and FinCEN—review their penalty sections for the most current dollar limits and policy updates (IRS FBAR and FATCA pages).

Practical steps if you receive a mismatch notice or realize you missed reporting

  1. Read the notice carefully and note the deadline. Notices usually explain what data the IRS is using.
  2. Gather documentation: account statements, foreign tax returns, broker statements, and correspondence from the FFI.
  3. Confirm whether the issue is a reporting omission (Form 8938/FBAR) or unreported income. If it’s only a missing form, often the penalty exposure is smaller than for unreported income.
  4. Consider filing an amended return (Form 1040X) to report missed income and attach Form 8938 if required. Include explanations and supporting documentation.
  5. If you haven’t filed FBARs, consider remedial options. For non-willful cases, the IRS Streamlined Filing Compliance Procedures may apply; for willful conduct, voluntary disclosure requires careful handling—see options in our article on Voluntary Disclosure Options for Unreported Foreign Accounts.
  6. Engage a tax professional experienced in international compliance before responding or negotiating—this can materially change outcomes and reduce penalties.

Related reading: compare filing choices and thresholds in our guide FBAR vs. Form 8938: What to File for Foreign Financial Accounts.

Real-world example (anonymized)

A U.S. expat in Germany had multiple accounts whose combined value exceeded $10,000 but neglected to report foreign interest on Schedule B and did not file Form 8938. An FFI FATCA report provided account details to the IRS, and FinCEN’s FBAR data flagged the accounts. The IRS issued a CP2000 proposing additional tax and a penalty. The taxpayer resolved the case by filing an amended return, submitting the missing Form 8938, and entering the Streamlined Filing Procedures to mitigate FBAR penalties. Early disclosure and cooperation significantly reduced civil exposure.

Best practices to minimize matching risks

  • Reconcile foreign account statements to what you report each year.
  • File FinCEN Form 114 (FBAR) timely via the BSA E‑Filing System when required.
  • Report specified foreign financial assets on Form 8938 when thresholds are met.
  • Keep contemporaneous records (statements, fund transfer details, foreign tax returns) for at least six years.
  • Use voluntary disclosure pathways if past noncompliance exists; consult a specialist—see our resource on FBAR penalties and remediation options: FBAR Penalties: Consequences of Non-Compliance.

Closing notes and disclaimer

The IRS and Treasury have built a powerful information ecosystem. From my 15+ years advising clients, the most reliable way to avoid escalated enforcement is timely, complete reporting and prompt remediation when errors occur. This article summarizes common processes and practical fixes but does not replace personalized advice. For individual guidance tailored to your facts, consult a qualified tax attorney, enrolled agent, or CPA with international tax experience.

This content is educational and should not be construed as legal or tax advice. For official guidance, review the IRS FBAR and FATCA pages and FinCEN resources cited above.