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OVDP Closure: Penalties Breakdown

Further to our announcement that the IRS will be shutting down the Overseas Voluntary Disclosure Program, we outline below some of the penalties taxpayers may face after the September OVDP closure date:

  • A penalty for failing to file a tax return – The penalty is 5 percent of the balance due, plus an OVDP shuts penaltiesadditional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The maximum penalty is 25 percent.
  • A penalty for failing to pay the amount of tax – A penalty of 0.5 percent of the amount of tax shown on the return, plus an additional 0.5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
  • A penalty for failing to file FBARs – The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. Non-wilful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
  • A penalty for failing to file Form 8938 – reporting the taxpayer’s interest in certain foreign financial assets. The penalty for failing to file is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
  • There are a number of informational returns that must be filed if the taxpayer has an interest in a foreign trust (as grantor or beneficiary), an interest in a foreign corporation, or foreign partnership.
    • Generally, failure to file any of these forms has a minimum penalty of $10,000
    • However the trust forms  (Form 3520 and Form 3520A have a penalty based on the amount of the contribution made or the benefits received.  These can be substantially greater than the minimum $10,000.)
  • As well as the possibility of criminal charges

Avoiding these penalties by getting back into the US tax system may be the best course of action for some taxpayers.  For guidance on these and other voluntary disclosure queries, contact one of our tax managers.

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