New IRS Offshore Disclosure Penalty Structure
New IRS Offshore Disclosure Penalty Structure: In Late November (2018), the IRS issued a memorandum detailing the changes, modifications, and updates to IRS Offshore Disclosure.
Although the IRS has discontinued OVDP, the IRS has also updated the IRM (Internal Revenue Manual) procedures (Sometimes referred to as “Domestic Voluntary Disclosure”) to reflect the changing times and recent offshore enforcement priorities.
The updated rules are overall the same…but different.
How Have the Rules Changed?
As with any penalty, the main issue clients wrestle with when assessing whether offshore disclosure is right for them is…what’s it going to cost me?
In other words, once you sludge past all the excess verbiage contained in the memo, the only real issue is whether the pros outweigh the cons in your particular situation
The IRS breaks the Penalty down in to four (4) parts:
Penalties on Taxes Due
Under prior OVDP, the applicant paid a “unpaid tax penalty” of 20% per year, for each year there was unpaid tax. So, if your OVDP was due primarily to unreported income (vs. assets or accounts), you may have had a significant Penalty on Taxes Due.
Example: David had unreported foreign income each year of $300,000 interest income, and since the money was passive income – it did not qualify for the FEIE. If his tax liability came out to about $110K per year. The 20% penalty would be $22,000 + interest for 8 years – which is substantial.
Under the new guidelines, the penalty is generally, one “Fraud” penalty on the taxes due in the year with the highest tax liability – typically a 75% penalty. So here, the penalty would be about $85,000 + Interest.
Depending on which year the amount was due, coupled with the interest – it would still be very substantial, but less than the it would be (in this example) under the prior calculation.
Penalties on the FBAR
The IRS carves out a specific penalty for the FBAR (as opposed to other forms), and refers to the IRM (Internal Revenue Manual) for guidance.
Under the IRM, the FBAR penalties are generally going to be $100,000 or 50% of the maximum balance – whichever is GREATER.
While there is wiggle room for the agent to negotiate a lower or higher penalty, it would appear that the IRS plans on issuing a 50% penalty.
This amount aligns with the “Bad Bank” penalty under the traditional OVDP – which mean if you had any of your money in a bad bank, then ALL the unreported accounts were subject to a 50% penalty – including the money that was not in a bad bank.
Informational Returns Penalties
The IRS will use these penalties, sort of, kind of like a swing vote. In other words, the penalties will not be automatic – there are not automatic penalties for failing to file the informational returns.
But, depending on the amount, extent, and nature of the FBAR penalties, the IRS can issue penalties for non-compliance with informational returns.
So, if you had no FBAR penalties (since all your non-compliance stems from undisclosed business interests or trusts), the IRS can still hit you with penalties for non-filing of the 5471, 8865, 3520-A, etc.
Likewise, if you were hit with massive FBAR penalties (because the majority of your non-compliance stemmed from undisclosed foreign accounts) you may catch a break for penalties involving the informational returns.
Depending on your specific facts, and the nature of your unreported income, assets, accounts and investments, you may be hit with other penalties for Excise Taxes (such as Foreign Life Insurance premiums), Employment Tax, Estate and Gift tax, etc.
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 all the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
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.