OVDP Offshore Penalty Structure: Introduction

The official IRS Offshore Voluntary Disclosure Program (OVDP) constitutes a viable voluntary disclosure option for many taxpayers. However, whether this is the best voluntary disclosure option will, in large part, depend on whether the OVDP penalties are lower than the penalties that a taxpayer would be facing under alternative voluntary disclosure options.

The answer to this critical question depends on your attorney’s ability to properly estimate potential OVDP penalties. In this article, I will focus on introducing the general structure of the Offshore Penalty (note that the income-tax related penalties are not discussed in this article).

OVDP Offshore Penalty

It is a requirement of the OVDP that the taxpayers who enter the program 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.

General Structure of the Offshore Penalty

The Offshore Penalty incorporates a penalty structure which contains three different penalty rates. The default penalty rate is 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure (the “penalty base”).

The default penalty rate applies to all cases except the cases where the two alternative rates apply: 12.5% and 5%. Each of these exceptions has its own set of strict requirements; the 5% penalty rate structure is much more diverse and complex that the 12.5% one, but the IRS will expect strict compliance with all of the terms of these exceptions. In my practice, I often find that the IRS will be pressuring hard to disqualify a taxpayer from alternative penalty rates.

Whether your particular case satisfies the requirements of either or both of the alternative penalty rates is the question that only your attorney can answer. The qualification is highly fact-dependent and will require a very detailed analysis of your situation.

Calculation of the Offshore Penalty

The Offshore Penalty calculation consists of three steps. First, your attorney should determine what assets should be included in the calculation of the Offshore Penalty (i.e. determine the penalty base). Second, your attorney should determine what penalty rate should apply to your assets (i.e. determine what penalty category applies). Finally, after the determinations under the first and second step are made, you attorney should determine the highest account balance (if the asset is a financial account) and the fair market value of other assets, convert the values to US dollars and apply the appropriate penalty rate (i.e. calculation of penalty base and application of the penalty rate).

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

Sherayzen Law Office can help you with the disclosure of any of your foreign assets. Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current tax 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).

Contact Sherayzen Law Office NOW to schedule your consultation!