What kinds of assets does the offshore penalty apply to

The offshore penalty applies to a broad range of assets that are related to tax non-compliance, as defined under the Offshore Voluntary Disclosure Program (OVDP) and further clarified in various IRS FAQs and notices. The types of assets to which the offshore penalty applies, as outlined in the retrieved information, include:

• 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 broad definition encompasses:
  • Financial accounts holding cash, securities, or other custodial assets.
  • Tangible assets such as real estate or art.
  • 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. Furthermore, if the Service determines that the entity is an alter ego or nominee of the taxpayer, the penalty may be applied to the taxpayer’s interest in the underlying assets.
• Tax noncompliance includes failure to report gross 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.

Additionally, the offshore penalty is intended to apply to offshore assets that are related to tax non-compliance, including assets acquired with funds that were subject to U.S. tax but on which no such tax was paid. The penalty applies regardless of whether the assets are producing current income. If the assets were acquired with after-tax funds or from funds that were not subject to U.S. taxation and have not yet produced any gross income, there has been no U.S. taxable event and no reporting obligation to disclose. However, if the assets produced gross 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 the funds used to acquire the assets. Moreover, if the foreign assets were held in the name of an entity such as a trust or corporation, there would also have been an information return filing obligation that may need to be disclosed.

In summary, the offshore penalty applies to a wide array of assets related to tax non-compliance, including but not limited to financial accounts, tangible and intangible assets, and interests in entities, with specific considerations for assets held through entities and the source of funds used to acquire such assets.

Sources:
IRS FAQ
§ 6038D. Information with respect to foreign financial assets
IRS FAQ
IRS FAQ
IRS FAQ
Notice 2014-52
The War Against Offshore Investments and Foreign Corporations