The new offshore disclosure framework offers a more flexible penalty structure than the previous Offshore Voluntary Disclosure Program (OVDP). This may benefit some taxpayers, but it could also result in large penalty assessments for others.
The following penalties may be assessed under the new offshore disclosure rules. Keep in mind that you will also be required to pay back taxes and interest for the six-year disclosure period.
Civil Fraud Penalty
The default rule states that the civil fraud penalty should be applied to the one year with the highest tax liability. This penalty is equal to 75% of the unpaid tax, so a tax liability of $50,000 would result in a civil fraud penalty of $37,500.
However, the IRS examiner has the discretion to apply this penalty to more than one tax year. The penalty can be applied to all six years in the disclosure period, and can even be applied to years outside the disclosure period if the taxpayer fails to cooperate.
Willful FBAR Penalties
This is the biggest penalty that can be assessed under the new offshore disclosure rules. The willful FBAR penalty can equal the greater of $100,000 or 50% of the highest aggregate account balance. However, many different factors could result in a higher or lower penalty assessment.
The following factors can be considered when assessing FBAR penalties under the Internal Revenue Manual:
- For FBAR violations occurring over multiple tax years, the penalty is usually limited to 50% of the highest aggregate account balance over the multiple-year period. In other words, the penalty is usually assessed only for the year with the highest account balance.
- IRS examiners have the discretion to assess the willful FBAR penalty for multiple years. However, the total penalty can’t exceed 100% of the highest account balance during the disclosure period.
- Lower penalties can be assessed if mitigating factors are present.
Negotiating Lower Penalties
Taxpayers can also argue for lower penalty amounts. The civil fraud penalty can be replaced by the 20% accuracy-related penalty, and willful FBAR penalties can be replaced by non-willful FBAR penalties, which max-out at $10,000 per violation.
You’ll need facts to support your arguments, and these lower penalty assessments will be limited to exceptional cases. Talk to your tax attorney about whether you have a case for getting a lower penalty assessment. If so, you may also want to consider using the Streamlined Filing Compliance Procedures if you qualify.
Even if you do receive willful FBAR penalties, there’s still a lot of room to negotiate how much the penalties will be. Consult a tax attorney to get a better idea of what you can expect from the new offshore disclosure rules.
The Gartzman Law Firm can find the best offshore disclosure option for your situation. Use our contact form to request a consultation with an Atlanta tax resolution attorney.