Sam Brotman, JD, LLM, MBA August 24, 2014 7 min read

The OVDP Process – Part Four


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

Example of the Penalty Structure in the OVDP Process

The Criminal Investigative unit is charged with assessing the penalty structure. The structure itself is nonnegotiable and the examiner lacks discretion to make any adjustments. The following is an example prepared by the IRS[1]:

The values of OVDP assets are aggregated for each year and the offshore penalty is calculated at the applicable rate (either 27.5 percent or 50 percent) of the highest year’s aggregate value during the period covered by the voluntary disclosure.

If the taxpayer has multiple OVDP assets where the highest value of some OVDP assets is in different years, the values of OVDP assets are aggregated for each year and a single offshore penalty is calculated at the applicable rate of the highest year’s aggregate value.

For example, assume the taxpayer had the following amounts in a foreign financial account over the period covered by his voluntary disclosure. It is assumed for purposes of the example that the $1,000,000 was in the account before 2005 and was not unreported income in 2005.

Year Amount on Deposit Interest Income Account Balance
2005 $1,000,000 $50,000 $1,050,000
2006   $50,000 $1,100,000
2007   $50,000 $1,150,000
2008   $50,000 $1,200,000
2009   $50,000 $1,250,000
2010   $50,000 $1,300,000
2011   $50,000 $1,350,000
2012   $50,000 $1,400,000


(NOTE: This example does not provide for compound interest, and assumes the taxpayer is in the 35-percent tax bracket, does not have an investment in a Passive Foreign Investment Company (PFIC) and files a return but does not include the foreign financial account or the interest income on the return. This example further assumes that the taxpayer is subject to a 27.5 percent offshore penalty.)

Under the OVDP Process

If the taxpayer in the above example comes forward and his voluntary disclosure is accepted by the IRS, he faces this potential scenario:

He would pay $553,000 plus interest. This includes:

  • Tax of $140,000 (8 years at $17,500) plus interest,
  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
  • A miscellaneous offshore penalty of $385,000 (i.e., $1,400,000 x 27.5%).

If the taxpayer didn’t come forward, when the IRS discovered his tax and FBAR noncompliance, he would have to pay substantially more in penalties. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

Outside the OVDP Process

The civil liabilities outside the Offshore Voluntary Disclosure Program potentially include:

  • The tax, accuracy-related penalties, and, if applicable, the failure-to-file and failure-to-pay penalties, plus interest, as described above,
  • FBAR penalties totaling up to $3,825,000 for willful failures to file complete and correct FBARs (2007 - $575,000, 2008 - $600,000, 2009 - $625,000, 2010 - $650,000, and 2011 - $675,000, and 2012 - $700,000),
  • The potential of having the fraud penalty (75 percent) apply, and
  • The potential of substantial additional information return penalties if the foreign financial account is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Case Resolution in the OVDP Process

Assuming the taxpayers and the service can successfully negotiate all of the above twists and turns, the case will be resolved by a written agreement known as a closing agreement. The taxpayer will pay all taxes, interest, and penalties. In addition they will agree to abide by the tax laws going forward, and the matter will be resolved. As previously mentioned to date, $6.5 billion of tax revenue has been collected under the OVDP process and its predecessor programs. If an agreement cannot be reached, the taxpayer has the right to opt out of the program as discussed in the next section.

Questions about the OVDP process? Please give our office a call.


"Sam is a wonderful, results-oriented and extremely knowledgeable and talented attorney, who really has 'heart' in working on behalf of his clients, and explains options in a straightforward, respectful manner. He has assisted us with great outcomes which have added to our quality of life. I would not hesitate to recommend Sam for his services as he is an ethical, personable and expert attorney in his field. You will likely not be disappointed with Sam's work ethic, approach and his efforts."

-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: April 14, 2024

Receive the Best of
Brotman Law

Get this topic delivered straight to your inbox.

New call-to-action

Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law



Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.

  • Expanded benefits during your first consultation with the firm.
  • Priority appointment scheduling and appointment times.
  • Complementary access to our firm’s concierge services.
  • Receive updates and “insider only” tax strategies and tactics.
  • And many more benefits.

Not Sure Where to Start?

Step 1 Start Here

Start Here

These ten big ideas will change the way you think about your taxes and your business.

Start Here

Step 2 Learn About Your Situation

Learn About Your Situation

Find the articles and videos you need to make the right tax decisions in the learning center.

Visit the Learning Center

Step 3 Explore Our Services

Explore Our Services

It is not just about what we do, but who we are, why we do it, and how that benefits you.

View All Services

Step 4 Get Your Game Plan

Get Your Game Plan

Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.

Book an Action Plan