FBAR/OVDI LANCE WALLACH: FBAR Offshore Bank Accounts and Foreign Income Att...

FBAR/OVDI LANCE WALLACH: FBAR Offshore Bank Accounts and Foreign Income Att...: You may want to think about participation in the IRS’ offshore tax amnesty program (called the Offshore Voluntary Disclosure Initiative). Do...

I received an interesting call today from someone concerned about the IRS penalties for failure to file a Report of Foreign Bank and Financial Accounts, better known as an FBAR (TDF-90-22.1 for those looking for the IRS form number).  For those not already aware of the penalties, the IRS can and routinely does assess penalties of $100,000 or 50% of the highest balance of an unreported foreign bank or brokerage account. And those penalties are for each year that an account is unreported. There are ways to beat these penalties, however.

U.S. taxpayers with more than $10,000 in offshore accounts are required annually to file an FBAR form. This year, certain taxpayers must also comply with the new Foreign Account Tax Compliance Act (“FATCA”) and file a form 8938 as well. (Filing one does not eliminate the need to file the other.) Offshore accounts are pretty broadly defined and include bank accounts, certificates of deposit, brokerage accounts, many foreign retirement plans and some insurance products.

Fail to file an FBAR and the government can impose a 50% penalty for each year the account is unreported. In certain cases, taxpayers can also be charged with a felony punishable by 5 years in prison. Take a hypothetical account with a $100,000 balance opened 8 years ago. Assuming no change in the balance, the IRS can impose $400,000 in penalties on an account that only contains $100,000! (50% or $50,000 x 8 years.)

The IRS is offering a tax amnesty called the Offshore Voluntary Disclosure Program. (Yes, it too has an acronym and is sometimes called “OVDI” or “OVDP”). Program participants don’t have to worry about criminal prosecution and face a one time penalty of 27.5% of the highest balance during the years in which the accounts were not reported. (The IRS is presently looking back 8 years.)

Twenty Seven (27.5%) percent is certainly a lot of money. There are ways to reduce that penalty, however.

First, the IRS does have two lower penalty tiers –  5% and 12.5%. The criteria for these special amnesty rates can be found