UPDATED FEBRUARY 22, 2017 to include information about opting-out after a transitional request denial.
With the IRS latest (Offshore Voluntary Disclosure Program) OVDP rules announced in June of 2014, many people who are in the Standard OVDP now have the option of converting from the Standard OVDP to the new Streamlined 0% "Offshore" OVDP or the Streamlined 5% "Domestic" OVDP. But how is converting Standard OVDP to Streamlined OVDP done? And is it the best idea?
Converting Standard OVDP to Streamlined OVDP: Eligibility
Who is eligible for converting Standard OVDP to Streamlined OVDP? In order for you to be eligible for converting Standard OVDP to Streamlined OVDP, you must have mailed the Disclosure Letter and attachments before July 1, 2014, AND
- Remained in OVDP but not yet received a fully executed closing agreement; OR
- Opted-out of OVDP but not yet received a letter initiating an examination.
What is the Procedure for Converting Standard OVDP to Streamlined OVDP?
- Must submit all required submission documents as required by the relevant OVD program in which you are participating.
- Must submit a written statement for the appropriate Streamlined program; and
- Must submit full payment of the tax, interest, and any accuracy-related, failure-to-file, and/or failure-to-pay penalties that would be due under the OVDP, if these payments were not already made.
- Revenue Agent/ OVDP Processing must determine that taxpayer is eligible for transitional treatment and must agree that the available information is consistent with the taxpayer’s certification of non-willful conduct. Examiner will review and determine first and manager must agree. In some cases, a central review committee will review the determination to ensure consistency.
Effect of Converting Standard OVDP to Streamlined OVDP
For Streamlined Domestic Offshore Procedures, the miscellaneous penalty under the Streamlined procedures would apply instead of the normal OVDP penalties. Although this too, is a Title 26 penalty (like an income tax penalty), as opposed to the Title 31 FBAR penalty, that is the Bank Secrecy Act penalty. Everything else stays the same: disclosure period; execution of 906 is required; payment of accuracy-related, failure-to-file, and/or failure-to-pay penalties; and alternative PFIC computation is available. In the streamlined program, there is no official protection from criminal investigations.
The reality is that the IRS has perhaps hundreds of thousands of people it could prosecute, but can only indict about 3000 people per year, and really only like to indict those cases which are the easiest to prosecute. Being in a Streamlined OVDP makes a criminal case much more difficult than a case where someone is not in any program or submitted a so-called "soft-disclosure."
Some Observations about Converting Standard OVDP to Streamlined OVDP
We have heard of instances where OVDP Revenue Agents and Group Managers are coming up with their own processes for who qualifies for converting standard OVDP to Streamlined OVDP. Yet, OVDP is an area of law when IRS FAQs are often the clearest source of law. Congress allows IRS-wide leeway in coming up with their own processes, as very few people in government actually understand what the IRS does.
Individuals and practitioners who do not specialize in OVDP are often over-matched with a confusing array of procedures that aren't always followed and have not foreseen every eventuality. For "domestic" offshore cases, if you do qualify for the streamlined program, you may still want to opt-out. The very reasons why you qualify for the Streamlined Program are the very reasons why you may be a great opt-out candidate. Remember, most people did make mistakes on their tax returns. We wrote about the incredibly common Schedule B mistakes here. To win an opt-out, it is o.k. if you have some "bad" facts.
Regarding opt-outs, the IRS and many practitioners will advise against it. The IRS dislikes opt-outs because they are time-consuming (tax returns with foreign income are mind-bogglingly more complicated). Many practitioners are leery about challenging the IRS for something they are not so sure about themselves.
If you are denied transitional treatment, this does not mean you won't be successful during an OVDP opt-out for two reasons. First, penalty mitigation guidelines may lower an assessment. Second, a determination of willfulness during an Opt-Out is reviewable by IRS appeals whereas a denial of transitional treatment is not.
If you are unsure about your best course of action regarding Converting Standard OVDP that is not going so well click on the box below. No one can guarantee a result, but it is possible to maximize your chances of a possible result.