We have reviewed the new 2011 OVDI FAQs and noticed that the Service has refined…
19 May, 2012
Depending on the circumstances, we sometimes recommend some taxpayers to opt out of the voluntary disclosure initiative and allow us to demonstrate the absence of willfulness and avoid the normal FBAR penalty regime. We have been aggressively pursuing OVDI opt-outs for some of our clients. In doing so we have been advocating for Normal FBAR Penalty Mitigation to apply. For those who do not know about the Normal FBAR Penalty Mitigation, you should see http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e1317. The Normal FBAR Penalty Mitigation are also provided below.
Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004
The Bank Secrecy Act (BSA) allows the Secretary of the Treasury some discretion in determining the amount of penalties for violations of the FBAR reporting and record keeping requirements. There is a penalty ceiling but no minimum amount. This discretion has been delegated to the FBAR examiner.
- The examiner may determine that the facts and circumstances of a particular case do not justify a penalty.
- If there was an FBAR violation but no penalty is appropriate, the examiner should issue the FBAR warning letter, Letter 3800.
When a penalty is appropriate, IRS has established penalty mitigation guidelines so that the penalties determined through the examiner’s discretion are uniform. The examiner may determine that:
- A penalty under these guidelines is not appropriate, or
- A lesser amount than the guidelines would otherwise provide is appropriate.
The examiner must make this determination with the written approval of the examiner’s manager. The examiner’s workpapers must document the circumstances that make mitigation of the penalty under these guidelines appropriate . To qualify for mitigation, the person must meet four criteria:
- The person has no history of criminal tax or BSA convictions for the preceding ten years and has no history of prior FBAR penalty assessments;
- No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose;
- The person cooperated during the examination; and,
- IRS did not determine a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account
| Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 – Per Person Per Year | |
|---|---|
| Non-Willful (NW) Penalties | |
| To Qualify for Level I-NW – Determine Aggregate Balances | If the maximum aggregate balance for all accounts to which the violations relate did not exceed $50,000 at any time during the year, Level I – NW applies to all violations. Determine the maximum balance at any time during the calendar year for each account. Add the individual maximum balances to find the maximum aggregate balance. |
| Level I-NW Penalty is | $500 for each violation, not to exceed an aggregate penalty of $5,000 for all violations. |
| To Qualify for Level II-NW – Determine Account Balance | If Level I-NW does not apply and if the maximum balance of the account to which the violations relate at any time during the calendar year did not exceed $250,000, Level II-NW applies to that account. |
| Level II-NW Penalty is | $5,000 for each Level II-NW account violation, not to exceed 10% of the maximum balance in the account during the year |
| To Qualify for Level III-NW | If Level I-NW does not apply and if the maximum balance of the account to which the violations relate at any time during the calendar year was more than $250,000, Level III-NW applies to that account. |
| Level III-NW is | $10,000 for each Level III-NW account violation, the statutory maximum for non-willful violations. |
| Willfulness Penalties | |
|---|---|
| To Qualify for Level I – Determine Aggregate Balances | If the maximum aggregate balance for all accounts to which the violations relate did not exceed $50,000, Level I applies to all accounts . Determine the maximum balance at any time during the calendar year for each account. Add the individual maximum balances to find the maximum aggregate balance. |
| Level I Penalty is | The greater of $1,000 per violation or 5% of the maximum balance during the year of the account to which the violations relate for each violation. |
| To Qualify for Level II – Determine Account Balance | If Level I does not apply and if the maximum balance of the account to which the violations relate at any time during the calendar year did not exceed $250,000, Level II applies to that account . |
| Level II Penalty is per account | The greater of $5,000 per violation or 10% of the maximum balance during the calendar year for each Level II account . |
| To Qualify for Level III | If the maximum balance of the account to which the violations relate at any time during the calendar year exceeded $250,000 but did not exceed $1,000,000, Level III applies to that account . |
| Level III Penalty is per account. | The greater of (a) or (b): (a) 10% of the maximum balance during the calendar year for each Level III account, or (b) 50% of the closing balance in the account as of the last day for filing the FBAR . |
| To Qualify for Level IV | If the maximum balance of the account to which the violations relate at any time during the calendar year exceeded $1 million, Level IV, the statutory maximum, applies to that account. |
| Level IV Penalty is per account the statutory maximum | The greater of (a) or (b): (a) $100,000, or (b) 50% of the closing balance in the account as of the last day for filing the FBAR.Our law firm expects unabated aggressive enforcement of the US tax laws, including increased criminal prosecutions and civil audit examinations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets. |
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.
Tags: amnestyAsset Protection FBAR foreign account offshore accounts OVDP penalties and interest voluntary disclosure
Category: Planning for Tax Minimization