12.5% OVDP Offshore Penalty Category

In an earlier article, I introduced the structure of the OVDP (Offshore Voluntary Disclosure Program) Offshore Penalty. In this essay, I would like to explore one aspect of that structure – the possibility of reducing the Offshore Penalty to 12.5%.

Offshore Penalty

The taxpayers who enter the OVDP must pay the Offshore Penalty. This penalty is imposed in lieu of all other penalties that may apply to the taxpayer’s undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period.

The default rate of the Offshore Penalty under the OVDP is 27.5%, but, in limited circumstances, it is possible to reduce the penalty to only 12.5% (assuming that the taxpayer does not otherwise qualifies to a lesser penalty rate).

Eligibility Requirements for 12.5% Penalty Rate

The taxpayers may be qualified to a reduced Offshore Penalty rate of 12.5% under the following circumstances. During each of the years covered by the OVDP, the taxpayer’s penalty base (i.e. the highest aggregate balance in foreign bank accounts and the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) must be less than $75,000.

Therefore, there are two basic requirements. First, the highest penalty base must be less than $75,000. Second, this must be the case in each of the years.

Strict compliance is required by the IRS. For example, in a situation where the taxpayer made one deposit in some early year covered by the OVDP and that deposit briefly brought the account balance above $75,000, the taxpayer will not be eligible to the reduced 12.5% Offshore Penalty.

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

Whether the 12.5% Offshore Penalty rate applies in your particular situation is a question that can only be answered by an international tax attorney who has thoroughly examined your case.

This is why you should contact Sherayzen Law Office for help NOW.

Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current FBAR liability as well as the liability that you would face under the OVDP, determine the available disclosure options and implement the appropriate disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).

No FBAR Penalties – Q&A 17 of the OVDP

There are some taxpayers who should not be using the official IRS Offshore Voluntary Disclosure Program (OVDP). The IRS expressly singled out one category of such taxpayers in its Q&A 17 of the OVDP Rules.

Q&A 17 only applies to the taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs. The key to the application of Q&A 17 is that there should be no underreported tax liabilities by the taxpayer and the taxpayer was not previously contacted regarding an income tax examination or a request for delinquent returns. In such a situation, the IRS is not likely to impose a penalty for the failure to file the delinquent FBARs.

Whether your situation falls within the scope of Q&A 17 should be determined by a tax attorney experienced in the area of voluntary disclosures. If your attorney determines that Q&A 17 applies to your case, you do not need to use the OVDP. Rather, your attorney should file the delinquent FBAR reports according to the FBAR instructions and attach a statement explaining why the reports are filed late.

While Q&A 17 appears to have a clear application, there are plenty of gray-area cases that almost reach the scope of this OVDP provision but still fall short of meeting all of the requirements. In such case, it will be up to the taxpayer’s attorney to determine the proper course of his client’s voluntary disclosure.

Contact Sherayzen Law Office for Voluntary Disclosure Help with Undisclosed Offshore Accounts

If you have unreported offshore accounts, contact Sherayzen Law Office for help with your voluntary disclosure options. Our experienced international tax firm will thoroughly review your case, assess your FBAR liability, identify the available voluntary disclosure options and implement the agreed-upon strategy (including preparation of all legal and tax documents).