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Disproportionate Penalties for FBAR Non-Filers

On Behalf of | Jun 27, 2013 | International Tax Law, IRS, Tax Controversy, Tax Crimes |

In the National Taxpayer Advocate’s 2012 Report to Congress, it issued data highlighting the disproportionate penalties to account holders with undisclosed offshore accounts who participate in the IRS’ Offshore Voluntary Disclosure Program (OVDP). Generally, if a taxpayer has an aggregate of more than $75,000 at any time during the year in undisclosed accounts, the taxpayer in the OVDP program will be required to pay a 27.5 percent penalty on the highest account balance for one of the years included in the offshore voluntary disclosure. Some taxpayers barely pass the $75,000 threshold while others greatly exceed that amount. In the recent report, OVDP participants in the 10th percentile with accounts of $78,315 paid penalties that were greatly disproportionate to those in the 90th percentile with accounts in excess of $4 million. For those in the 10th percentile, they paid at least 575 percent of the tax, interest and penalties on their unreported income. Contrast that with those in the 90th percentile who paid only 86 percent or less.

In 2012, the IRS provided relief via a Streamlined Nonresident Filing Initiative to some taxpayers who qualify. The program provided that qualifying taxpayers deemed to be “low risk,” who have simple tax returns and owe less than $1,500 in tax, could enter into the streamlined program without triggering penalties. In 2013, at the recommendation of the National Taxpayer Advocate, the $1,500 threshold was eliminated allowing other taxpayers to participate in this program, however they may be treated as being a “higher risk.” The National Taxpayer Advocate will continue to advocate for taxpayers who inadvertently failed to report foreign accounts on information returns to reduce or eliminate the excessive penalties associated with the non-compliance of these taxpayers.

To review the portion of the National Taxpayer Advocate’s report related to this issue, please click here.


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