OVDP: Double or Nothing – The 50% Penalty Quandary

On October 15, 2015, the Internal Revenue Service updated its “facilitator” list, making the decision of whether to participate in the Offshore Voluntary Disclosure Program (OVDP) even more time sensitive.  So the question presents itself – is OVDP the right choice for me?  There are quite a few factors that taxpayers must weigh when deciding whether or not to voluntarily disclose via participation in OVDP.  Typically, the decision comes down to dollars and cents – how much will it cost, not only in tax, interest, and the all-important offshore penalty, but also in legal and accounting fees.  While the total cost can be relatively predictable, thanks to the hard line penalty structure of OVDP, such predictability does not make the decision any easier.

Under the typical OVDP penalty structure, taxpayers pay a 27.5% offshore penalty that consists of the highest aggregate balance of the taxpayer’s foreign financial assets that are subject to the offshore penalty during the taxpayer’s covered tax years.  However, if the taxpayer maintains or previously maintained a financial account with a facilitator foreign financial institution, the 27.5% penalty automatically jumps to 50%.

The IRS’ facilitator list comprises foreign financial institutions that the IRS has identified as facilitating nondisclosure, tax evasion, or otherwise noncompliance with US tax law (e.g., UBS AG, Credit Suisse AG, Stanford International Bank, Ltd., HSBC India, etc.).  These “facilitator” foreign financial institutions are currently cooperating with the IRS, generally under the Foreign Account Tax Compliance Act (FATCA), by supplying data and information relating to accounts held by U.S. taxpayers.  Indeed, many U.S. taxpayers have probably already received letters and notices from these facilitator foreign financial institutions alerting such taxpayers of their cooperation with the IRS.

The dilemma for taxpayers is not if their bank will land on the IRS’ facilitator list, but when their bank will land on the list.  As the IRS’ facilitator list grows, taxpayers may be ineligible to obtain the benefit of the lower 27.5% offshore penalty.

At JDKatz, P.C., we believe that all clients should comply with their filing and reporting obligations.  We further believe that, in the event a client is non-compliant, the decision of whether to participate in OVDP is time sensitive.  Indeed, one day you can be staring down at a 27.5% penalty.  The next day, that penalty can jump to 50% and further complicating an already difficult decision.