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Offshore Banking Tax Penalty Relief – What Is It and How do I Qualify?

Last updated 03/19/2024 by

Lee Huffman
Offshore wealth is big business. According to a 2013 report by the Boston Consulting Group, there was $8.5 trillion in offshore wealth. Other reports have the total offshore wealth at $32 trillion (source). It is perfectly okay to have money in an offshore bank. The problem arises when you do not report it to Uncle Sam. If you have money overseas and haven’t been filing your taxes and disclosure forms, you could be in serious trouble. Here are your options for offshore banking tax penalty relief and how to qualify for each.

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Is it okay to have an offshore banking account?

The quick answer is yes. There are many legitimate reasons to have an offshore banking account.
You may want an easy way to send money to family and friends overseas. You may be a business owner that needs to pay vendors in local currency. Or you simply like the privacy that some banks provide. Your reasons are personal and that is fine.
However, the government is concerned about terrorism, drug cartels, and other illegal activities. So you are required to disclose any foreign financial accounts if they exceed $10,000 in value at any point during the year.
Also, don’t forget that the government wants its share of taxes.

What should you do if you have offshore bank accounts?

If you have offshore bank accounts that exceed $10,000 in value at any time during the year, the Bank Secrecy Act requires you to file a Foreign Bank Account Report (FBAR).
For balances greater than $50,000, you must file Form 8938, Statement of Specified Foreign Financial Assets.

What if I haven’t filed FBAR reports?

If you haven’t filed your FBAR reports, you’ll want to do so BEFORE the IRS contacts you. If the IRS contacts you first, some of your best options will then be off the table.
Anthony E. Parent is a founding partner of Parent & Parent, the IRS Medic. He says, “If you are not under audit, you can get relief from FBAR penalty exposure by entering into an offshore voluntary disclosure program.”
The penalties are steep, so you’ll want to address your situation as soon as possible. Failure to file FBAR reports start at $12,459 per violation, per year for non-willful violations. The price jumps to the greater of $124,588 or 50% of the balance for willful violations.
Keep in mind that these penalties are on top of the taxes you would have owed had you filed in the first place. Plus, interest will be charged on the amount of unpaid taxes. Avoiding the IRS is an expensive undertaking.

Non-willful vs. Willful Violations

Non-willful violations are when you didn’t know that you were supposed to file the FBAR reports. Willful violations reflect an intent to deceive the government by not disclosing your foreign assets or income.
The more common terms for willful violations would be tax evasion or fraud. In this scenario, you are moving money overseas or maintaining foreign bank or investment accounts for the purpose of avoiding detection by the IRS.
Parent says, “Penalties in these programs can range from no penalty at all to a penalty of 50% of the account value if the bank involved is a ‘blacklisted bank.'”
If your account is held at one of these IRS blacklisted banks (see below) your OVDP penalties will increase from 27.5% to 50%.

What is the best approach to minimize penalties?

Here are four ways to minimize offshore banking penalties, and how to qualify for each.

1. Submit all FBARs that are due

First and foremost, you’ll need to file all of the reports that are due for the disclosure period. This is a requirement no matter which approach you take. Do not wait any longer.
As stated earlier, many of the best (aka least expensive) options will no longer be available to you if the IRS contacts you first about unfiled reporting.

2. Use the Streamlined Compliance Procedures

This program requires you to submit all of your outstanding reporting and pay a relatively minor penalty fee of 5% of the aggregate value of your foreign accounts. If you live outside the United States, the IRS may waive this fee. However, this option is only available if your failure to file FBARs was non-willful.

3. Offshore Voluntary Disclosure Program (OVDP)

The OVDP closed on September 28, 2018. The program had stiff penalties starting at 27.5% of your offshore balances. In exchange, it offered immunity from criminal prosecution, investigation, examination, and audits of your past actions. That is, assuming you made full disclosure.
However, time is running out on OVDP. The OVDP program closed on September 28, 2018. If you have foreign accounts that you willfully hid from the IRS, act now before this opportunity is no longer an option.
Since the OVDP’s launch in 2009, more than 56,000 taxpayers came forth to pay over $11 billion in back taxes, interest, and penalties.

4. Quiet Disclosure

The final (and riskier) approach is to perform “quiet disclosure.”
With this strategy, taxpayers start reporting their foreign assets with their current and/or amended returns without alerting the IRS of the need to file previous FBARs.
This method is very risky because it is a willful act to hide information from the IRS and will not protect you from potentially severe civil penalties and criminal prosecution.
Money is valuable. But most people in jail would gladly pay a large portion of their net worth to be free again. Don’t gamble with your freedom.

Take action now

If you have offshore balances, make sure that you report them to the IRS.
As long as you disclose your accounts from the beginning, you won’t incur any penalties. But if you haven’t previously filed FBARs, prepare those reports and amend your taxes sooner rather than later.
If you’re unsure where to start, consider working with a tax attorney who can guide you in the right direction.
The Streamlined Compliance Procedures are a relatively inexpensive option for people who made an honest mistake with a fine of only 5% of your highest balance during the timeframe in question.
Other options to consider are the IRS’s delinquent FBAR submissions and delinquent international information return submission procedures.
If you have or could have tax debt you can’t afford to pay, talk to a tax debt expert. There may be tax relief options available.

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Lee Huffman

Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better.

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