Unlike FBAR penalties that can be asserted for multiple years (up to six under the six-year statute of limitations for FBARs), the offshore penalty is a one-time penalty. The values of foreign accounts and other foreign assets are aggregated for each year and the penalty is calculated at 27.5 percent of the highest year’s aggregate value during the period covered by the voluntary disclosure. For calendar-year taxpayers, the voluntary disclosure period is the most recent eight tax years for which the due date has already passed.
Below is an example of how the offshore penalty is calculated:
Assume that Jack holds the amounts listed in the chart below in a foreign account over the period covered by his voluntary disclosure. He files a return but does not include the foreign account or the interest income on his return. Nor does he file a FBAR. Jack decides to apply to the voluntary disclosure program. Assume further (1) that Jack deposited the $ 500,000 in his account before 2003, properly reporting it; (2) that Jack’s voluntary disclosure is accepted by the IRS; and (3) that Jack is in the 35-percent tax bracket.
| Year | Amount on Deposit | Interest Income | Account Balance |
| 2003 | $ 500,000 | $ 25,000 | $ 525,000 |
| 2004 | $ 25,000 | $ 550,000 | |
| 2005 | $ 25,000 | $ 575,000 | |
| 2006 | $ 25,000 | $ 600,000 | |
| 2007 | $ 25,000 | $ 625,000 | |
| 2008 | $ 25,000 | $ 650,000 | |
| 2009 | $ 25,000 | $ 675,000 | |
| 2010 | $ 25,000 | $ 700,000 |
Because the highest account balance was in 2010, the base for the offshore penalty will be $ 700,000. Therefore, the offshore penalty is $ 192,500 (i.e., $ 700,000 x 27.5%).
Within the OVDP framework, Jack would pay $ 276,500. This includes:
- Tax of $ 70,000 (8 years at $ 8,750/year) plus interest;
- An accuracy-related penalty of $ 14,000 (i.e., $ 70,000 x 20%); and
- An offshore penalty, in lieu of the FBAR penalty, of $ 192,500.
If Jack didn’t come forward and the IRS discovered his offshore activities, he would face up to $ 2,271,500 in tax, accuracy-related penalties, and FBAR penalties. He would also be liable for interest and possibly additional penalties. And if this doomsday scenario comes to fruition, he could ultimately be prosecuted.
Outside of the offshore voluntary disclosure program, Jack’s civil liability includes:
- Tax, accuracy-related penalties, and, if applicable, the failure to file and failure to pay penalties, plus interest;
- FBAR penalties totaling up to $ 1,912,500 for the willful failure to file complete and correct FBARs:
- 2005: $ 287,500 (.5 x $ 575,000),
- 2006: $ 300,000 (.5 x $ 600,000)
- 2007: $ 312,500 (.5 x $ 625,000)
- 2008: $ 325,000 (.5 x $ 650,000)
- 2009: $ 337,500 (.5 x $ 675,000),
- 2010: $ 350,000 (.5 x $ 700,000).
- A potential fraud penalty of 75%; and
- The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.
Had the foreign activity started before 2003 and Jack decided not to enter the program, the IRS may even examine tax years prior to 2003.
What other penalties (and interest) apply within the offshore program?
- Of course, taxpayers must pay the tax deficiency for each year during the disclosure period and interest on the deficiency.
- Information-return penalties such as the Failure to File penalty for the respective tax years.
- A 20% accuracy-related penalty under IRC § 6662(a) on the full amount of offshore-related underpayments of tax for the respective tax years.
- Under OVDP, the civil fraud penalty generally does not apply.