This is the fifth article in the Offshore Voluntary Disclosure Program (OVDP) Frequently Asked Questions series. This series is intended to provide taxpayers and practitioners with answers to the most commonly asked questions relating to the Internal Revenue Service’s (IRS’s) 2012 OVDP. Other posts in this series, offering a basic description of the OVDP and some of its core requirements, can be found here.
How does the IRS’s FBAR Penalty Structure Work?
This is a continuation from the most recent post in this series. The most critical distinction between the IRS’s assessment of FBAR penalties is the significant difference between penalties assessed as a part of the OVDP and penalties assessed outside the OVDP. Regardless of the amount in the account at issue, a taxpayer’s decision of how to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), can seem like a foregone conclusion when taking stock of this distinction.
The IRS’s OVDP Frequently Asked Questions publication contains the clearest and simplest example of the impact of the IRS’s various FBAR penalties.
In that example, the taxpayer in question owns a foreign account that has the following amounts in it during the period at issue:
Tax Year Amount on Deposit Interest Income Account Balance
2003 $1,000,000.00 $50,000.00 $1,050,000.00
2004 $50,000.00 $1,100,000.00
2005 $50,000.00 $1,150,000.00
2006 $50,000.00 $1,200,000.00
2007 $50,000.00 $1,250,000.00
2008 $50,000.00 $1,300,000.00
2009 $50,000.00 $1,350,000.00
2010 $50,000.00 $1,400,000.00
If the taxpayer, who for purposes of this example is in the 35% tax bracket, participated in the IRS’s OVDP, the tax and penalty assessed would total approximately $518,000.00. The tax and penalty are detailed as follows:
Type of Obligation Calculation Amount Owed
Tax (8 years x $17,500.00) $140,000.00
Accuracy-Related Penalty ($140,000.00 x 20%) $28,000.00
Additional Penalties ($1,400,000.00 x 27.5%) $385,000.00
The $518,000.00 is a fraction of what the taxpayer might pay if they do not participate in the program and their failure to report is discovered at a later date. The amount that could be assessed in that scenario, which we covered in our most recent post in this series, was more than $4,000,000.00. Even in the OVDP, the taxpayer will have to pay the IRS more than a third of what was in the foreign account that was not reported. However, that is significantly less than being assessed for three times the amount in that very same account.
Please check back in the weeks and months ahead for posts detailing the concept of “quiet” disclosure and the risks of adopting such an approach.