IRS “50% Penalty” List Increased to 56 Foreign Banks

The IRS has added four more foreign financial institutions to its list of “Foreign Financial Institutions or Facilitators.” Those who had accounts at one or more of these institutions are required to pay an increased penalty of 50% if they wish to participate in the Offshore Voluntary Disclosure Program (OVDP). The list is expected to continue to grow as the U.S. government continues its ongoing investigations of offshore tax evasion.

When the Offshore Voluntary Disclosure Initiative was first announced in 2009, participants paid a penalty equal to 20% of the highest aggregate balance in their offshore accounts during the most recent eight year period. That penalty was increased to 25% when the program was re-opened in 2011. In 2012, the current OVDP was opened on an indefinite basis, with the penalty amount set at 27.5%.

Last year, the IRS announced that individuals who had one or more accounts at a financial institution that has been publicly identified as being under investigation would be required to pay an increased penalty of 50%. The idea is that individuals should be subjected to a harsher penalty if they only came forward after learning that one of their financial institutions is being investigated by the U.S. government. The list, which started with 10 financial institutions and facilitators, is now at 56.

This change will not impact those whose failure to report foreign accounts was accidental, even if they had accounts at one or more of these financial institutions or facilitators. At the same time that the increased 50% penalty was announced, the IRS announced new Streamlined Procedures for non-willful violators. Under these new procedures, taxpayers must file amended returns and pay taxes for the three most recent tax years (as opposed to eight), and FBARs for the six most recent years (as opposed to eight). The offshore penalty under the streamlined procedures is equal to 5% of the highest year-end balance during the six year FBAR period. Taxpayers who resided outside of the United States may not have to pay an offshore penalty at all.

Unlike the OVDP, the streamlined procedures do not provide immunity from criminal prosecution, so it is vital to consult with an experienced attorney before deciding which program to participate in. In order to be eligible, taxpayers must come forward before their foreign accounts are discovered. With the Foreign Account Tax Compliance Act now in effect, foreign financial institutions in more than 100 countries will be turning over information about U.S. account holders to the IRS on an annual basis.

Without a doubt, the 50% penalty is very harsh and punitive. Failure to come forward voluntarily, however, is likely to result in a civil audit and/or criminal investigation down the road. Civil FBAR penalties can be draconian, in some cases even exceeding the total value of the foreign accounts.