This is the fourth 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, here, and here.
How does the IRS’s FBAR Penalty Structure Work?
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, did not participate in the IRS’s OVDP, the tax, accuracy-related penalties, additional penalties like late-filing and late-payment, and the FBAR penalty would total approximately $4,378,000.00. That is more than 3 times the amount in the account ending in the tax year 2010. Those taxes and penalties 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
FBAR Penalties – Willful Penalty (50% x amount in the account each year) $3,825,000.00
The above calculations do not take into account the 75% fraud penalty that could be assessed in lieu of the 50% willful FBAR penalty. That penalty would increase these obligations by nearly $2,000,000.00.
Please check back in the weeks and months ahead for posts detailing the impact of the IRS’s FBAR penalty structure on a taxpayer who participates in the OVDP.