Unreported Offshore “Bad Bank” Accounts: How a Washington DC Tax Lawyer Can Help

With potential tax penalties and civil or criminal prosecution for failure to report accounts at foreign financial institutions, offshore account holders must be wary. The dangers could be even worse when the offshore account is at a “bad bank” – a bank designated by the IRS as helping its account holders to evade U.S. taxes.

A Washington DC tax lawyer, experienced with offshore accounts, is essential for any taxpayer with an unreported bad bank account. There are methods for the taxpayer to come into legal compliance and minimize tax penalties. However, there are also potential pitfalls, where the taxpayer might pay increased penalties or open themselves up to criminal exposure. Washington DC tax lawyer Kevin E. Thorn can provide the guidance and advocacy the taxpayer needs.

What is a “Bad Bank?”

While there are potential consequences for unreported offshore accounts, those consequences may change if the foreign institution is a “bad bank.” The IRS maintains a list of foreign institutions that worked with U.S. taxpayers to evade or avoid American taxes. An institution on this list is known as a “bad bank.” If a taxpayer holds an undisclosed offshore account at a bad bank, they may face increased scrutiny or penalties.

Former “Bad Bank” Penalties Prior to 2019

From 2009 to 2018, the IRS maintained programs for taxpayers to disclose previously unreported foreign assets. These disclosure programs were directed at taxpayers who might otherwise continue to not report offshore accounts to avoid civil and criminal penalties. By participating, taxpayers could bring themselves into legal compliance and avoid criminal exposure. The last such program in effect was the Offshore Voluntary Disclosure Program (OVDP).

In September 2018, the IRS discontinued the OVDP, then later issued new voluntary disclosure guidelines. This has resulted in more uncertainty for taxpayers with “bad bank” accounts. And it has also increased the need for an experienced Washington DC tax lawyer like Kevin E. Thorn to help “bad bank” account holders navigate their legal issues.

Under the OVDP, taxpayers had to pay large mandatory tax penalties. For most taxpayers, this penalty was 27.5% of the taxpayer’s previously undisclosed foreign bank account balances. But if an account was held at a “bad bank”, the penalty jumped to 50% of foreign bank assets. And this penalty applied to all foreign bank assets, not just the assets held at the bad bank. 

Undisclosed “Bad Bank” Accounts Under New 2019 Voluntary Disclosure Guidelines

Under the new voluntary disclosure guidelines, there are no more mandatory penalties for previously undisclosed offshore accounts.  Instead of the 27.5% or 50% penalties under the OVDP, the new guidelines allow the IRS more flexibility in assessing penalties.

The end of mandatory penalties increases the uncertainty for taxpayers. For example, the taxpayer can receive a large penalty for willful failure to disclose an account on a Foreign Bank Account Report (FBAR), but the taxpayer may request non-willful FBAR penalties. The taxpayer may or may not be eligible for the streamlined filing procedures for offshore accounts. There is no more bright-line distinction between disclosures for bad bank accounts and other offshore accounts.

With increased uncertainty over the penalties they may face, U.S. taxpayers with offshore accounts at bad banks need high-quality legal guidance. Washington DC tax lawyer Kevin E. Thorn has extensive experience in offshore account laws and he can provide this guidance.

Consult With a Washington DC Tax Lawyer at Thorn Law Group About Your Unreported Offshore “Bad Bank” Account

If you are facing tax reporting issues over an offshore account at a bad bank, contact the Thorn Law Group to see how a Washington DC tax lawyer can assist. To schedule a consultation, contact Kevin E. Thorn, Managing Partner, at 202-349-4033 or ket@thornlawgroup.com.