Disclosing Foreign Bank Accounts Through the OVDI Program

A taxpayer who has not disclosed foreign bank accounts to the IRS and to cure this delinquency and avoid criminal repercussions applies to the Offshore Voluntary Disclosure Initiative (“OVDI”), generally must pay a miscellaneous Title 26 offshore penalty, in lieu of traditional penalties that would apply to foreign assets or entities outside of OVDI.  The most significant penalty that the offshore penalty replaces is the penalty for failure to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).  The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation.  Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Generally, the miscellaneous offshore penalty under the OVDI program equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%.  For example, consider a taxpayer who has the following account balances for the eight-year OVDI disclosure period 2005 through 2012:

A taxpayer in the OVDI program will pay any additional tax and a 20% accuracy-related penalty for the unreported interest income each year, plus the offshore penalty equal to 27.5% of the highest account balance during the disclosure period, or $277,200 ($1,008,000 x 27.5%).

By contrast, if the taxpayer does not participate in the OVDI program, the IRS could charge a fraud penalty of 75% instead of the 20% accuracy-related penalty for the unreported interest income each year, plus the offshore penalty equal to 50% of the highest account balance during the disclosure period, or $504,000 ($1,008,000 x 50%) (50% of the highest account balance for each of the past six years).  The IRS could also proceed with criminal prosecution that could include incarceration.

Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty.  Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% offshore penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% offshore penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% offshore penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced penalty in certain circumstances.  The taxpayer in the example above would only pay an offshore penalty of $50,400 ($1,008,000 x 5%). The IRS has been very strict in applying the 5% rate so it would be in your best interest to have the tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. represent you to avoid any pitfalls and gain the maximum benefits conferred by this program, including a possibility of reduced offshore penalties.