OVDP Penalty & the IRS

OVDP Penalty: The OVDP Penalty calculation framework has changed over the past year. The IRS developed OVDP in 2009 (aka OVDI). The program was in response to the pursuit of offshore tax havens, and facilitating Switzerland FFIs to enter into deferred prosecution agreements. OVDP provided taxpayers with a safe opportunity to get into offshore compliance for unreported offshore accounts, assets, investments and income. Then in mid-2018, the Internal Revenue Service abruptly, gave notice that it was closing the OVDP program. Following the close of OVDP, the IRS also expanded the traditional Voluntary Disclosure Program (VDP) to take over where OVDP left off.

What are the Penalties on Taxes Due?

A summary of Offshore Voluntary Disclosure Program Penalties:

Old OVDP

With the prior OVDP, there was a 20% annual penalty on the unreported taxes due. For example: You owed $25,000 in tax for Year 1, you paid a $5,000 penalty (plus estimated interest) in addition to the taxes due. Then, for Year 2, if you owed $50,000 in tax, then you had to pay another $10,000 penalty (plus estimated interest), and so on for all eight years.

Updated Voluntary Disclosure Procedures

Now, Taxpayer will generally pay a 75% “fraud” penalty on the amount of tax due (for the highest year only).  If the taxpayer never filed taxes, a similar framework applies IRC 6651(f).

“Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty. 

In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”

*Taxpayer can try to argue for a reduced penalty under IRC 6662 (generally, 20%), but the IRS has stated that it is unlikely the reduced penalty would be granted.

Penalties on FBAR

Old OVDP

The IRS issued a 27.5% penalty (or 50% if a bad bank) for the year with the highest unreported foreign account balance.

For example, if you had $2,000,000 in unreported balances for the highest year in the compliance period. your penalty would be $550,000.

*This presumes no “bad banks” were involved.

Updated Voluntary Disclosure Procedures

Under the updated procedures, the IRS will refer to the IRM 4.26.16 and 4.26.17. That generally means that the penalty is $100,000 or 50% maximum value of the account, whichever is GREATER.

After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.

Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval.

Failure to File Informational Returns

Old OVDP

Under prior OVDP rules, informational returns did not receive preferential treatment.

Updated Voluntary Disclosure Procedures

 This is a pleasant surprise. The IRS will NOT automatically issue penalties against applicants who failed to file informational returns.

Informational returns typically include:

  • 5471 Form (Corporation that is Foreign)
  • 5472 Form (Foreign Owner of a “U.S. Corporation”)
  • Form 8865 (Partnership that is Foreign)
  • Form 3520-A (Foreign Trust)

The IRS Agent assess the totality of the circumstances and will determine if penalties are warranted.

“Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.”

Other Penalties

Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.

Appeal

Taxpayers retain the right to request an appeal with the Office of Appeals.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.

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