Non-FBAR Penalites and Offshore Voluntary Disclosures

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The following summarizes in explicit detail why taxpayers who have an unfilled Report of Foreign Financial or Bank Account (FBAR) must consider entering the Offshore Voluntary Disclosure Program (OVDP). Not only does the taxpayer potentially reduce the risk of FBAR penalties, but the penalties for for failing to file certain information returns are eliminated.

The OVDP provides for a single unified penalty, called a “civil miscellaneous penalty” which supersedes the other possible penalties which could be imposed for failure to file information returns. An information return, like Form 3520, which is a Report of Foreign Gift, Bequest or Transfer to A Foreign Trust, is not a tax return, but is required to be filed under the Internal Revenue Code, in the case of Form 3520, and many others. The following is from RIA Checkpoint and illustrates how significant a failure to file an information return can be.

“The persons required to file the notices or returns (i.e., the “responsible party” in the case of certain transfers to foreign trusts, or U.S. beneficiaries who receive distributions from foreign trusts, see must pay a penalty equal to the greater of $10,000 or 35% of the “gross reportable amount” if the returns or notices aren’t properly filed. If any failure to file continues for more than 90 days after the day on which IRS mails notice of a failure to file to the person responsible for the penalty, that person must pay an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the expiration of the 90-day period.”

Other information returns have equally significant penalties, like forms 5471, Controlled Foreign Corporation return, or Form 8938 Statement of Specified Foreign Financial Assets. The maximum penalty for each failure to file Form 8938 is $50,000.

When a taxpayer has exposure to the information return penalties, particularly when multiple years are involved, it is a wise to consider the OVDP program.