The Title 26 Penalty of 27.5% of the highest aggregate balance in foreign bank accounts/foreign assets includes unreported foreign bank accounts/assets held by individuals or businesses.
This “offshore penalty” is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset.
This Title 26/27.5% penalty applies to all assets directly owned by the taxpayer including financial accounts/holding cash, securities or other custodial assets; tangible assets such as real estate or art, and intangible assets such as patents or stock or other interests in a U.S. or foreign business.
If such assets are indirectly held or controlled by the taxpayer through an entity, the penalty may be applied to the taxpayer’s interest in the entity. If the entity is taxpayer’s nominee; an alter-ego, the penalty may be applied to the taxpayer’s interest in the entity.
For purposes of the 27.5% penalty, tax non-compliance includes: failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset.
Regarding non-income producing assets, if offshore assets were acquired with funds that were subject to U.S. tax but on which no such tax was paid, the offshore penalty would apply regardless of whether the assets are producing current income. If the non-income producing assets (e.g., land, art, jewelry, automobiles, yachts, planes, wine collection) have produced no taxable income, there has been no U.S. taxable event and no reporting obligation to disclose. The U.S. taxpayer will be required to report any current income from the property or gain from its sale or other disposition at such time in the future as the income is realized.
If there has not been tax non-compliance, the 27.5% offshore penalty would not apply to those assets. If the foreign assets (e.g. land, art, et al.) produced income subject to U.S. tax during the voluntary disclosure period which was not reported, the assets will be included in the penalty computation, regardless of the source of funds used to acquire the assets. If the foreign assets were held in the name of an entity such as a trust or corporation, there would be an information return filing obligation that may need to be disclosed.
If a taxpayer transferred funds from one unreported foreign account to another during the voluntary disclosure period, any duplication will be removed before calculating the 27.5% penalty. However, the burden will be on the taxpayer to establish the extent of the duplication.