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What Civil Penalties Apply to Taxpayers Who Fail to Use in OVDP?

What Civil Penalties Apply to Taxpayers Who Fail to Use in OVDP?

One of the greatest advantage of participating in the Offshore Voluntary Disclosure Process is the immunity it provides from a variety of civil penalties. If a taxpayer has undisclosed financial assets or accounts which are discovered by the IRS, numerous penalties may apply, potentially creating a huge financial burden on the taxpayer. Participating in OVDP can massive reduce the financial impact of failing to disclose foreign financial accounts and assets. If a taxpayer who is eligible to participate in OVD fails to do so, the following penalties may apply.


Failure to File FBAR Penalty

One of the largest civil penalties associated with nondisclosure of foreign financial accounts and assets relates to the FBAR reporting requirement. The FBAR filing requirement applies to any U.S. person if the aggregate value of the person’s foreign accounts exceeds $10,000 at any point during the calendar year.[1] This $10,000 threshold applies to the aggregate of any foreign account or asset held by the U.S. person, and the relevant amount for the purposes of the calculation is the maximum amount of each account or asset during the calendar year. In fact, the reporting obligation may be triggered even if none of the individual accounts has a balance of $10,000 or more during the applicable calendar year. Any taxpayer who fails to file an FBAR when required, may be subject to the Failure to File FBAR penalty. This penalty can be as high as $100,000 or 50% of the total balance in the account for the violation.[2] If the taxpayer can demonstrate that the failure to file FBAR was non-willful, the penalty is lowered to only $10,000 per violation.


Penalty for Failing to File Form 8938

Less severe than the FBAR Failure to File Penalty is the Form 8938 penalty. This filing requirement has a higher threshold, but the penalty does not go as high. Under IRS regulations, Form 8938 is required for taxpayers with interests in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities.[3] Form 8938 reporting obligation applies to certain U.S. taxpayers whose interest in foreign accounts equals$50,000 on the last day of the tax year or $75,000 at any time during the tax year.


The penalty for failing to file each one of these information returns 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.[4]


Penalty for Failing to File Form 3520

Participating in the Offshore Voluntary Disclosure Program can also protect taxpayers against the penalty associated with Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The Form 3250 requirement applies to taxpayers who participate in certain transactions involving foreign trusts. If the taxpayer fails to file this form penalty may be imposed consisting of the greater of $10,000 or 35 percent of the gross reportable amount. Returns reporting gifts are subject to a slightly different penalty calculation; in that case, the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift. If a taxpayer subject to the Failure to File Form 3250 penalty had participated in OVDP, the penalty would not apply.


How a Tax Attorney Can Help

If you have undisclosed offshore foreign accounts or assets, you may be eligible to participate in OVDP. In order to evaluate whether OVDP is the right decision for your international tax situation, you should consider consulting a knowledgeable tax attorney. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.



[1] Form TD F 90-22.1 (Report of Foreign Bank And Financial Accounts), at 6.

[2] 31 U.S.C. § 5321(a)(5).

[3] IRC § 6038D.

[4] Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers, FAQ 5, http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.

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