Breaking News: United States Rapidly Adding to 50% OVDP Penalty Known Banks List

The tax and accounting professionals at the Tax Law Offices of David W. Klasing have learned that the IRS has been quietly and rapidly adding banks to the list of known foreign banks that assist taxpayers in maintaining secretive accounts. Although it may not seem significant at first glance, it is a move that may put many Americans at risk for both federal prison sentences as well as a series of devastating financial blows in the form of back taxes, fees and penalties.  If your bank is on the growing list of international banks, you will face a 50% OVDP penalty (if you apply through the program), instead of the 27.5% offered to US taxpayers through the Offshore Voluntary Disclosure Program (OVDP).

Foreign Bank Account Reporting (FBAR) laws require that taxpayers disclose any foreign financial accounts that have had a balance of $10,000 or greater at any point during the year. Those who fail to comply with the law are faced with harsh consequences that have been called “draconian” by some tax experts. Once the IRS has determined that a taxpayer has not complied with the FBAR requirements, a determination will be made as to whether the failure to comply was willful or not. It the former is established, the taxpayer will be subject to penalty of 50% or more of the highest balance of the undeclared account as well as the very real possibility of time in a federal prison.

In our previous coverage of the government’s FBAR enforcement efforts, we have reported on the reluctance of the IRS and Department of Justice to define exactly what type of activity takes a taxpayers FBAR noncompliance out of the non-willful classification and places it into the very serious category of willful. The government has clearly established a system that allows for a large amount of discretion on the ground level in determining how to go after non-compliant taxpayers.

In an effort to provide some guidance, the Service has published a list of banks that are known to the IRS to help Americans set up and maintain secret accounts. The Foreign Financial Institutions or Facilitators list (commonly referred to as the known-banks list) started small and has steadily been growing. If a taxpayer has been found to be noncompliant with regard to FBAR laws, the IRS will look to see if they were a customer of one of the institutions on the known-banks list. If they were, they are deemed to have known that their bank was engaged in account secrecy and the taxpayer will be charged for willfully violating the FBAR statutes.

In a move that should concern all taxpayers that have or have had foreign bank accounts, the IRS has added six new banks to the known-bank list within the past week, growing the list to 21 banks. This means that taxpayers that still have undeclared accounts are in even more danger of spending time in a federal prison or paying financially crippling penalties and fines than they were a week ago. The news is surprising, as the list has historically not grown at such a rapid pace and signals to taxpayers as well as tax professionals that the list will continue to grow as will the number of accusations of willful FBAR noncompliance. The newest banks are listed below:

  • Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
  • MediBank AG (effective 5/28/15)
  • LBBW (Schweiz) AG (effective 5/28/15)
  • Scobag Privatbank AG (effective 5/28/15)
  • Rothschild Bank AG (effective 6/3/15)
  • Banca Credinvest SA (effective 6/3/15)

Doesn’t the IRS OVDP Program Limit the Penalties to 27.5%?

Many taxpayers have relied on the Offshore Voluntary Disclosure Program (OVDP) to protect themselves against some of the most serious consequences of breaking the FBAR laws. Participation in the program requires the taxpayer to pay back-taxes and a penalty in order to avoid criminal prosecution or even greater fines and penalties. Taxpayers that enter into the OVDP having banked at one of the listed financial institutions will still be treated as being “willful” but can avoid criminal prosecution with the payment of a 50% penalty, back-taxes, and certain other fines. That being the case, a taxpayer may think twice before coming forward.

Every taxpayer and each situation is different and participating in the OVDP may not be the right answer for all taxpayers, especially if you will be facing a 50% penalty in order to participate. Another issue may arise if the IRS already has a taxpayer’s information through investigations of their own or from the FATCA data exchange. A taxpayer that is already being investigated or is being audited for any issue is not eligible to enter the OVDP. If your tax professional does not conduct a thorough investigation of their own, the taxpayer may find himself or herself in a worse-off position than when they started. An experienced tax attorney with experience in FBAR compliance and the OVDP is your best chance of achieving the outcome that you most desire while ensuring that you don’t fall into any traps along the way.

The tax and accounting professionals at the Tax Law Offices of David W. Klasing are experienced in all aspects of tax audit, investigation, and litigation defense. Further, we have extensive experience in assisting clients decide whether the OVDP is right for them and if so, helping them navigate the process. Many taxpayers have the urge to try and go up against the IRS alone when faced with an audit or investigation, but the stakes are too high and the Service and Department of Justice are too fierce to go at it alone. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.