The Voluntary Disclosure (VDP) Limits Civil Willful FBAR Penalty

Is VDP Still a Good Deal to Limit Civil Penalties?

When a taxpayer is out of compliance for not properly reporting their foreign accounts, assets, investments, and/or income there are very options they have to get into offshore compliance. When the person is non-willful the Internal Revenue Service offers several options, such as the Streamlined Procedures, Delinquency Procedures, and reasonable cause. On the other end of the spectrum, when a person is willful and/or cannot certify the penalty of perjury that they are non-willful, there is only one program available to them. This is referred to as the IRS Voluntary Disclosure Program. In recent years, the penalty for the offshore version of the program has been set at 50% of the maximum value of the undisclosed foreign account aspects of the program. While this penalty can be a lot, the alternative can be staggering. Let’s take a brief look at how the VDP works to lower the willful FBAR penalty.

Willful FBAR Penalty Violation

As recent cases have shown, civil willful FBAR penalties are not limited to $100,000 per year and can be assessed at $100,000 per account.

As provided by the U.S.C., Title 31 (Money and Finance):

31 USC 5321 (5)(C)

(C)Willful violations.—

• • • In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

    • (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

      • (I) $100,000, or

      • (II) 50 percent of the amount determined under subparagraph (D), and (ii)subparagraph (B)(ii) shall not apply.

$100,000 is Not the Maximum FBAR Penalty

In prior years, there has been a conflict between the FBAR regulation and the statute involving willful FBAR penalties. This led some practitioners to take the position that willful FBAR penalties were limited to $100,000 (either per year or per compliance scenario). Unfortunately for Taxpayers, several courts struck down that argument, with most courts holding that civil willful FBAR penalties are not limited to $100,000 a year. Likewise, the regulation was updated to reflect that the limitation for civil willful FBAR Penalties should not be limited to $100,000.

VDP vs Willful FBAR Audit Example

Marshall is a US person. He willfully failed to report his foreign accounts to the IRS. He has six accounts worth a total value of $900,000. Under the voluntary disclosure program, the taxpayer is liable for a $450,000 penalty. This is a very large penalty, but the alternative could be worse.

Let’s say instead of going through VDP, Marshall decides not to enter the voluntary disclosure program. His Foreign Financial Institution (FFI) ends up reporting his account information to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). The IRS reviews the information from the FFI, audits Marshall and determined that he is in fact, willful.

Marshall could get hit with $100,000 penalty per account per year — although generally, the total limitation of penalties is 100% of the amount of money that was not reported in the compliance period — with the compliance period usually being six years. That means Marshall could be liable for $900,000 penalty. And while a $900,000 penalty represents 100% value of the undisclosed accounts, if we went back a few more years the IRS was issuing penalties upwards of 300% of the value of the undisclosed accounts which means instead of $450,000 under the voluntary disclosure program, Marshall could be looking at a $2.7 million penalty.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.