Part Five: The Streamlined Offshore Voluntary Disclosure

Part Five: The Streamlined Offshore Voluntary Disclosure

5 Things You Didn’t Know About FBAR Penalty Negotiations

Recently, the FBAR is in the spotlight since the IRS is having a new focus on the FBAR penalty enforcement actions. There are few important things that you have to keep in mind when negotiating FBAR penalties. The following paragraphs will explain them in a detailed manner.

1. FBAR penalties are staggering
The penalty can be draconian for taxpayers who have foreign accounts and have not reported it to the IRS. Higher the amount you have in overseas accounts, bigger will be the penalty. When compared with other IRS penalties, FBAR penalties can create huge risks to your financial well being. Therefore you must take this very seriously.

2. The two different kinds of FBAR penalties
The “ugly” FBAR penalty is $10,000. This penalty is assessed if the IRS thinks that you did not deliberately neglect to file an FBAR. And worse, there isn't anything to stop the IRS from assessing this innocent mistake penalty several times. If you have 4 unreported offshore accounts, the IRS can penalize you $40,000 a year. This is definitely outrage to us, but this is just what the law says.

The next type, "disastrous" penalty will be 50% of the offshore account value and this is applicable if it is an intentional avoidance of filing the FBAR. And similar to the “ugly“ FBAR penalty, it too can be assessed several times. This kind of multiple assessments by the IRS can wipe out you entire savings in matter of seconds.

3. The Internal Revenue Service doesn’t have to prove “willful neglect”
You are obligated to pay whatever penalty the IRS puts upon you. They might simply assume the "disastrous” penalty for your case and there isn't any necessity for the IRS to prove willfulness. It will be the taxpayers who bear the big burden of proving that their failure to comply was as a result of reasonable cause and not from “willful neglect”.

4. Appealing to a higher authority
You could file a suit in district court but before that, you need to exhaust your administrative remedies within the IRS. Or alternatively, you could pay out all the taxes before filing a suit for a refund. We strongly advise you to exhaust administrative remedies that are available in the IRS appeals process as this has lots of advantages. First, it's not necessary to pay any penalty till the process end. Second, you can find remedies from the IRS appellate process itself, making tax court unnecessary. In case, if you're not able to find a solution inside the IRS administrative remedies, a tax lawyer can find a receptive audience in IRS counsel and do negotiations with them. So without going to court trial, the FBAR penalties can be lowered.     

5. The OVDP route
Earlier, people made use of Voluntary Disclosure Programs largely to avoid facing criminal prosecutions. The current OVDP/ FBAR Amnesty is there to help people by creating a standardized format for dealing with the threat of disastrous or ugly FBAR penalty charges. This is why it is important to make use of the OVDP to negotiate your FBAR penalties.

Initially by going through the OVDI, the review will be much more favorable to you during the discussion of your “FBAR reasonable cause" position. But outside the OVDP, the IRS does not treat people as favorably as those who make themselves visible under the OVDP. No matter whether you made an innocent mistake or made an unadvised “quiet” or “soft” disclosure, the ground will be much less sturdy when it is outside the OVDP.

Though criminal charges can be a threat to an individual, an IRS civil audit can do even more much damage to a taxpayer's financial well-being. While you may avoid facing prison time, these horrific FBAR penalties can easily wipe out your entire wealth as well. Within the OVDP, penalty charges are capped. You will never have to pay more than one 27.5% FBAR equivalent penalty.

Find out where IRS Form 656 has gone!