IRS Offshore Disclosure – Highest vs. Year-End Balance Calculations
This article will summarize OVDP (Highest-Year Balance) vs. Streamlined (Highest “Year-End” Balance).
Once a person comes to the realization that they are going to submit to OVDP IRS Offshore Voluntary Disclosure Program and pay an upfront penalty in order to leverage against a possible much larger penalty in the future (or Opt-Out), they must determine which Offshore Disclosure program they are going to enter.
Aside from making the determination of whether a person is willful or non-willful, they must also be cautious to ensure they understand the different penalty structures for OVDP and the IRS Streamlined Program.
The two penalties are calculated differently, and can have a big impact on a person’s decision.
OVDP – Highest Balance
Unless certain circumstances apply, if a person was willful then they will enter OVDP – Offshore Voluntary Disclosure Program. Willful means the person had knowledge of their tax reporting obligations and responsibilities, but knowingly/intentionally/deliberately attempted to avoid, or evade tax and reporting requirements.
When an individual or business was “Willful” the IRS, DOT, and DOJ take less mercy — and thus the penalties are relatively high. In addition, not only are the penalties higher than in the Streamlined Program, but the calculation is also more intense. Namely, a person has to review each of the account/asset values to determine the highest balance at any time during the year (as opposed to the year-end balance for the Streamlined Program).
If you happen to bank or invest with an institution that only issues quarterly statements or monthly statements, you are allowed to rely on the interval of statement provided (in other words, if daily balances are unavailable then you do not have to obtain them). Unfortunately, if you utilize an institution that provides daily balances, it can be much more detrimental.
Specifically, let’s say for example your month-end balance was $400,000 – but at one time during the month your account was as high as $2 million and it is reflected on a financial statement you receive from the institution — in accordance with FBAR (Report of Foreign Bank and Financial Accounts) rules and regulations, you must use the $2 million balance as the high balance.
In addition, even though foreign real estate is not reflected on either an FBAR or 8938, if the property is used to generate income then the value of the property must be calculated into the penalty calculation.
Streamlined Offshore Disclosure Program is More Forgiving
The Streamlined Offshore Disclosure Program, or otherwise known as Streamlined Filing Compliance Procedures has a more lenient penalty structure. Why? Because individuals who submit to this program are non-willful and had no intent to defraud, evade, or avoid US tax reporting and compliance requirements.
As such, the U.S. government does not want to artificially increase the penalty to an amount that is not reflective of the account. As in the above referenced example for OVDP, the $2 million was only in the account for a very short period of time due to a transfer stemming from a sale of property (With OVDP, since the person is presumed ‘Willful,’ they are subject to the penalty on the highest balance – no matter how unfair it is – unless the applicant “Opts-Out” later in the process)
To avoid this outcome for the streamlined program, the date of calculation for the accounts is December 31 of each year. Therefore, in the above referenced scenario the taxpayer would not be penalized from the balance of $2 million, but rather the balance on December 31st value, which is the highest in the compliance period (8 years for OVDP, 3 or 6 years for Streamlined)
Highest Year’s Balance is the Penalty (Not Every Year)
There seems to be some confusion regarding the penalty; the confusion is can largely be attributed to the fact that many inexperienced Attorneys, CPAs, EAs, Accountants, etc. are trying to sell their services to unsuspecting taxpayers by getting them unnecessarily scared.
Under either one of these programs, the applicant does NOT pay a penalty for each year, but rather the taxpayer is penalized on a percentage of the highest year value. For OVDP the calculation includes the maximum account balance over the last eight years, while for the Streamlined Program the penalties based on the highest December 31st value during the last six years.
There are numerous other distinctions between these programs, and we reproduce a very popular article we authored detailing the difference between OVDP vs. Streamlined Program.
At the end of the article, and based on our many years of experience we have also provided links to much more comprehensive FAQs we have prepared for OVDP, Streamlined Program, FBARs and Expat Tax Laws.
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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.