Title 26 Miscellaneous Offshore Penalty: The Title 26 Miscellaneous Offshore Penalty of 5% is a reduced penalty offered to applicants of the IRS Streamlined Domestic Offshore Procedures (SDOP).
Title 26 Miscellaneous Offshore Penalty
The Title 26 Miscellaneous Offshore Penalty is significantly lower than the FBAR and other related penalties a foreign account holder would otherwise suffer if they were audited. The goal is to leverage a smaller penalty (now) against a potentially more devastating penalty(s) later.
For U.S. resident taxpayers considering entering SDOP, it is important to pre-analyze what the penalty will be so that the client has a good understanding of how much they will be out-of-pocket.
Sample Title 26 Miscellaneous Offshore Penalty Calculation
|Form 14654 Penalty Example||How to Calculate||Practice Pointer|
|Step 1: Evaluate your Accounts & Assets||There are many different accounts and assets that may be included in the computation. Two of the most common are assets and accounts involving FATCA (Foreign Account Tax Compliance Act) and FBAR (Report of Foreign Bank and Financial Account Form) *Some assets and accounts may be excluded from the penalty-base.||Be sure your foreign assets and accounts are not excluded from the penalty base|
|Step 2: Compile 12/31 Year-End Balances||Compile the 12/31 balances on your Foreign Accounts, Insurance Policies and other 8938/FBAR qualified accounts for each year within the compliance period.||The use of the December 31st helps avoid double-counting|
|Step 3: Select an annual exchange rate||Determine the proper exchange rate for each year. There are various exchange rates you can use, such as the IRS exchange rates and Department of Treasury exchange rates.||Practice Pointer: Stay consistent with the source of exchange rates you used.|
|Step 4: Aggregate the 12/31 balances||Total the 12/31 balances on your previously unreported Foreign Accounts, Insurance Policies and other 8938/FBAR qualified accounts (Value of Real Estate is not included for the Streamlined Program).||Be sure to only include accounts and assets that comprise the penalty base.|
|Step 5: Select the highest 12/31 aggregate balance||Pick the one-year that has the highest 12/31 balance (not highest max year balance, which is the standard for Traditional Voluntary Disclosure).||The 5% Penalty is not on every year -- just the highest year.|
|Step 6: Multiply the aggregate balance by 5%||Example: Michael's highest year 12/31 aggregate balance in the six (6) year compliance period is 2017. In 2017 his 12/31 balances totaled $2,600,000. His penalty would be $130,000.||Multiple by .05 -- not .50|
Can I Negotiate the Title 26 Miscellaneous Offshore Penalty?
No, unfortunately when a person enters the streamlined domestic offshore procedures, they are subject to a 5% penalty. The IRS agents are not authorized to negotiate the penalty, but is important to note that there are various assets which may be excluded from the computation.
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More information on SDOP
Here are some additional resources to assist you in your research journey:
- Streamlined Disclosure Common Question & Answer FAQs (lots of them!)
- Summary of FBAR Penalties (with Examples)
- What Happens when you are Willful, but go Streamlined?
- 10 Reasons no to make a “Quiet Disclosure”
Interested in Speaking with a Tax Specialist?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in Streamlined Domestic Offshore Procedures. Contact our firm today for assistance with getting compliant.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.