What to do with Offshore Voluntary Disclosure Program regrets

If you relied upon what the IRS claims on their website, you would likely be convinced that no matter what your criminal intent was, you must enter in Offshore Voluntary Disclosure Program (OVDP)…or else. This article is about what to do if you realized you were scared into something you should not have done.

Unfortunately this is a common scenario. A taxpayer realizes they made a mistake with their past returns, looks at the information on irs.gov and believes it to be true. While the IRS does publish information about the streamlined program, it is buried and often found too late to convince someone that that is the correct program for them.

Once you’ve freaked someone out by telling them that they are going to jail unless you do exactly what you say, it is difficult to get them to listen to anything else you say.

So, it is only after the smoke settles that many of our clients realize they made a mistake. Once that immediate fear of arrest is gone, people tend to look at things a bit more objectively. When they do, they discover that entering into the OVDP was a less than optimal move.

The bad news: Once you enter into the Full/Standard OVDP, you can not withdraw and make a streamlined submission.

Why? Because the IRS gets to make up any rules it wants. I’ve talked to the developers of both the first and current OVDP — the 2009 Offshore Voluntary Disclosure Initiative (OVDI) and the 2011 OVDI. Both of these gentlemen are now in private practice. Both told me that these programs were designed to catch those who intentionally hid assets and income; those with actual criminal exposure. Their focus was not to collect penalties, but rather to encourage compliance.

However, there is another group at the IRS who saw the massive amount of technical non-compliance as an opportunity to collect and assess huge penalties by scaring the living crap out of people.

Some IRS and DOJ employees value compliance. On the other hand, some IRS employees value penalties. You will see two contradictory messages: “You better get into this program or else” vs. an encouragement to enter into the Streamlined program (if any program is needed at all).

Because our of expertise, and because we actually deal with real criminal cases, we routinely suggest the Streamlined program to clients who are convinced they must use the Standard Full OVDP.

If you made a pre-clearance request, you do not need to go through with the Full OVDP.

If you made a Pre-Clearance, you can still go streamlined. Don’t let anyone tell you otherwise. You may really want to think about the advantages and downsides to the Streamlined Program — because you will see the options are rather limited once you are in the Full/Standard OVDP.

Options while in the Full/Standard OVDP

Option One: Continue with voluntary disclosure. Pay standard penalty of 27.5% or 50% standard offshore penalty

Advantages: Known result; criminal protection in place
Disadvantages: The known result could be bad. Time consuming.

Option Two: Continue with voluntary disclosure, but “opt-out” of standard offshore penalty.

Advantages: May result is much lower penalty — even if found willful.; criminal protection still in place.
Disadvantages: Unknown result until conclusion. Penalty could be worse than 27.5% penalty (likely not worse than 50% standard penalty— our first instinct is to opt-out anyone subject to the 50% “bad boy” black-list bank penalty). Time-consuming.

Option Three: Do nothing.

Advantages: The IRS could forget about you and it is possible your case falls through th cracks and goes away. We have not heard of this happening.
Disadvantages: We’ve never heard of a case just going away. More than likely you will have a removal audit. Standard will be exactly the same as an opt-out audit. However, the difference is that criminal protections don’t apply. While most of our clients don’t need criminal protection, for this reason we prefer to opt-out other then being kicked out though non-action.

Option Four: File a Streamlined submission anyway.

Advantages: It will feel like your are doing something positive.
Disadvantages: You won't be. It will likely be rejected.

What should you do if you made an OVDP in error?

Because facts for cases are so different, and because our clients often wildly over or underestimate their criminal culpability, we advise that you schedule a time to speak with one of our offshore attorneys and get an opinion from our firm. With clients around the globe, we have more offshore disclosure experience than anyone else. It's our goal is to find the right solution for your risk profile.

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