How to Calculate the Title 26 Miscellaneous Offshore Penalty

How to Calculate a Title 26 Miscellaneous Offshore Penalty: In this article, we explain How to Calculate a Title 26 Miscellaneous Offshore Penalty. For U.S. Residents who qualify as non-willful and meet the threshold requirements for filing under the IRS Streamlined Domestic Offshore Procedures, the program carries a 5% penalty. The 5% penalty is in lieu of the other FBAR penalties, which can be pretty tough — even when a person is non-willful. Calculating the Title 26 offshore penalty is more difficult than it appears. This is primarily due to the exceptions, exclusions and limitations involved in calculating the penalty. For example, the RRSP is excluded, as is certain foreign real estate — but other retirement plans may or may not be excluded. We have developed a sample calculation to help you better understand how to calculate the Title 26 Miscellaneous Offshore Penalty.

*This 6-Step was developed by Golding & Golding in 2017.

**Please always stay aware of rule changes and updates.

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.

        • Practice Pointer: Be sure to confirm which assets should be included/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.
        • Practice Pointer: 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).

        • Practice Pointer: 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).

        • Practice Pointer: 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.

        • Practice Pointer: Multiple by .05 — not .50

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