The Bottom Line: OVDI, OVDP, FBAR

October 18, 2012 — 1 Comment

Update 8//6/13: For more detailed and up-to-date information about offshore asset disclosures and foreign tax compliance, please refer to the following pages on our main website:

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You’ve probably heard a lot in the press over the past few years about offshore accounts, tax evasion, and wealthy individuals going to jail for having bank accounts in Switzerland or the Cayman Islands. However, what many people don’t realize is that the same laws which put these tax evaders in jail apply to ordinary citizens and residents – and have been around for many years. The Report of Foreign Bank and Financial Accounts (FBAR) requires taxpayers with accounts totaling more than $10,000 to file an annual report with the U.S. Treasury.  For taxpayers with offshore accounts totaling more than $50,000 during 2011, a brand new requirement came into effect – Form 8938 (Statement of Foreign Financial Assets). These and other requirements can subject those who don’t comply to civil penalties, criminal prosecution, and jail time.

The good news? The IRS knows that everyone isn’t a crook, and that many people had no idea that they were supposed to file. The IRS announced an Offshore Voluntary Disclosure Program (OVDP) in 2009, and an Offshore Voluntary Disclosure Initiative (OVDI) in 2011, which yielded more than $5 Billion in voluntary disclosures to date (see http://www.irs.gov/uac/IRS-Says-Offshore-Effort-Tops-$5-Billion,-Announces-New-Details-on-the-Voluntary-Disclosure-Program-and-Closing-of-Offshore-Loophole). These programs offered reduced civil monetary penalties for taxpayers coming forward with unreported accounts, and ensured that taxpayers would not face the FBAR criminal penalties. Due to the huge success of these programs (which are now closed), in 2012 the IRS announced a new OVDP with no announced deadline for taxpayers who still have not come forward under the prior two programs.

So how do you know if you had an FBAR filing requirement in the past? Well, you had to file an FBAR if:

1)      You were a United States “person” (which can include residents in the United States on a visa);

2)      You had a “financial interest” in, or “signatory authority” over any “financial account” in a foreign county or jurisdiction; and

3)      The total of all such foreign accounts exceeded $10,000 at any time (even for a day!) in a given year.

FBARs are due on June 30th of the following calendar year. Unlike income tax returns, there are no deadline extensions for filing your FBAR. This is why so many taxpayers have come forward under the OVDP and OVDI programs – they simply didn’t know they had an FBAR filing requirement until well after the deadline.

The terms of the 2012 OVDP offer penalties for the highest year of non-compliance (your “high-water mark” of foreign account values) at either 27.5%, 12.5%, or 5% of each account’s highest balance, along with normal tax-related penalties if you didn’t report foreign-earned income on your tax return.

If you don’t come forward, however, you could face a civil FBAR penalty of $10,000 per account, per year. You read that right. That means if you have 5 years and 20 accounts in each year, you could face a $1M FBAR penalty, even if all those accounts combined only held $11,000. Tack on the potential criminal penalties, and you’ll wish you had spent a little time and money up-front talking to a tax professional.

The bottom line: this is NOT an area of law where you want to go it alone. There are alternatives to the 2012 OVDP which may result in no criminal or civil penalties being asserted, and there are also defenses if the IRS tries to come after you. But wading through the quicksand that is the law in this area will be a lot more pleasant if you’re sitting on the shoulders of a competent attorney.

Written by Timothy Canney.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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  1. Report of Foreign Bank and Financial Accounts (FBAR) due June 30th « The Joy of Tax Law - June 15, 2013

    […] The Bottom Line: OVDI, OVDP, FBAR […]

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