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Show Me The Money! Is The Source of OVDP Revenue Coming From Taxes Or Excessive Offshore Penalties?

On June 18, 2014, IRS Commissioner John Koskinen disclosed that the 2009, 2011, and ongoing 2012 offshore voluntary disclosure programs have resulted in more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest, and penalties. On its face, the OVDIs appear to be bringing into the government’s coiffures an average of approximately 9,000 taxpayers a year with approximately $1.3 billion in revenue.

However, the last six months paint a very different picture. That period is marked by anemic growth. Indeed, there were only 2,000 additional disclosures and $500 million in additional revenue. That may lead one to speculate that the OVDI, at least for high net wealth disclosures, is petering out. Statistics show that the IRS streamlined program is not any better off. Specifically, the Taxpayer Advocate found that as of September 2013, approximately 3,000 taxpayers submitted returns reporting only an additional $3.8 million in taxes.

Not surprisingly, a substantial portion of the $6.5 billion in OVDI revenue consists of FBAR penalties, as opposed to taxes and other penalties.

There are some astonishing revelations regarding how disproportionate the offshore penalty is to a taxpayer’s unreported income. For example, in the July 16, 2014 report, the Taxpayer Advocate found that the median offshore penalty paid by those with the smallest accounts ($87,145 or less) in the 2009 OVDI program was nearly six times the tax on their unreported income. Reviewing the statistics pertaining to unrepresented taxpayers with small accounts is even more shocking. Among this class, the median offshore penalty paid was nearly eight times the unpaid tax.

But the disproportionate offshore penalty did not just claim those with small accounts as its casualties. It also targeted those with the largest accounts (more than $4.2 million), but not to the same extent as those with small accounts. Among taxpayers possessing the largest accounts, the median offshore penalty paid was about three times their unreported tax.

In her January 9, 2014 report, the Taxpayer Advocate previously found that for noncompliant taxpayers with small accounts, the combined FBAR and tax penalties reached nearly 600% of the actual tax due! The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances.

Are any statistics available for taxpayers who opted out or were removed? Yes. When the IRS audited this class of taxpayers, it assessed smaller, but still severe, penalties. These penalties amounted to roughly 70% of the unpaid tax and interest. Due to how heavy-handed the IRS has been towards taxpayers whose non-compliance has been trivial, at best, the Taxpayer Advocate reported that non-compliant taxpayers began avoiding OVDP like it was the plague, opting instead to make quiet disclosures.

Taxpayers making quiet disclosures correct old tax returns and pledge to be fully compliant in future years without subjecting themselves to the onerous offshore penalty, not to mention an extremely lengthy and overbearing OVDP process.

Others have taken the ostrich approach, digging their heads in the sand and ignoring their FBAR compliance obligations altogether. This is a recipe for disaster. Such taxpayers are putting themselves at grave risk for any one of a number of serious consequences, not the least of which is criminal prosecution. And while the likelihood of prosecution might be slim to remote, the same is not true about the willful FBAR penalty, otherwise known as the 800-pound gorilla of all IRS civil penalties.

For those who think that the IRS may not be able to meet its burden of proving willfulness for purposes of asserting the willful FBAR penalty, think again. In recent years, the IRS has spearheaded aggressive public relations campaigns to disseminate information regarding foreign bank account compliance to every corner of the globe, thus ensuring that U.S. expats have been put on notice. Indeed, they have used such mediums as the internet, social media, and collaboration with the State Department.

Why is this important? Under the theory of willful blindness, the IRS need only show that the taxpayer made a conscious effort to avoid learning about the FBAR reporting requirements. Due to the vast amount of publicity surrounding FBAR compliance these days, it is hard to imagine how anyone wouldn’t know about the FBAR reporting requirements, even an Eskimo living in an igloo in the North Pole. Thus, it has become increasingly difficult for a taxpayer to convince the IRS that he or she was truly oblivious to the FBAR filing requirements.

In what might be a shock, taxpayers with offshore accounts who have filed U.S. tax returns but failed to disclose their foreign accounts might be worse off than those who failed to file U.S. tax returns in the first place. Why? Because the former is but a heartbeat away from satisfying the IRS’s definition of willful blindness.

Form 1040 Schedule B refers to the instruction to Schedule B, which mentions FBARs. According to the IRS, a taxpayer, with hardly any diligence, could have easily learned of the reporting requirements. Indeed, a person could very easily read the instructions pertaining to FBAR compliance on the tax return. Failing to follow up on this knowledge may provide evidence of willful blindness.

Taxpayers can still breathe a sigh of relief. Thankfully, checking the wrong box on Schedule B, or no box at all, is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness. According to the IRS, two conditions must be satisfied in order for a taxpayer to be willfully blind: He must have failed to learn of the filing requirements and made efforts to conceal the existence of the accounts.

At the same time, the IRS’s interpretation of willful blindness should not be taken lightly. If the conditions are right, the IRS will not hesitate to unleash its secret weapon – the willful FBAR penalty. And when it does, there will be plenty of wailing and grinding of teeth.

In accordance with Circular 230 Disclosure

Original Post By:  Michael DeBlis


As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


4 thoughts on “Show Me The Money! Is The Source of OVDP Revenue Coming From Taxes Or Excessive Offshore Penalties?

  1. Avatar Just Me says:

    You talk about median penalties, but lets look at the lowest 10 Percentile in the last GAO report, and you will see that penalties were 129 times the tax revenue due!!!!

    Google: GAO report reveals OVDP minnows paid penalties of as much as 129x tax owed

    Average penalty from 2009/ program was $13,320 for a whopping $105 of taxes under reported over a 5 year period! Now what makes you think that is disproportionate? That is tongue in cheek if you don’t get the sarcasm. The IRS knew these minnows were probably non willful type, but quite happy to get their revenue numbers up by squeezing the oil out of them in their “one size fits all” program.

    Only now, 5 years later, have they finally woken up, and created another simplified program for the non willful, (that comes with a certification trap) but without any adjustment for their past WILLFUL and EGREGIOUS penalty collection behavior.

  2. Avatar chris says:

    On its face, the OVDIs appear to be bringing into the government’s coiffures an average of approximately 9,000 taxpayers a year with approximately $1.3 billion in revenue.

    so getting into the governments hair…great malaprop!

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