For many US taxpayers considering whether or not to enter in to the IRS Offshore Voluntary Disclosure Initiative/Program (OVDI/OVDP), one of the biggest concerns is, "What if I am forced to accept a 27.5% or 50% FBAR-equivalent offshore penalty? What if I am stuck with a bill that I can't afford to pay? What about even the 5% Streamlined penalty? What if I can't afford to pay the IRS but want to "come clean?"
First thing: The rules for IRS tax negotiations are exactly the same with the Offshore Penalty debts as with any personal tax debt.
It is not a crime to owe the IRS money. If you cannot pay your offshore penalty in full this will not kick you out of the program, this will not bring up criminal charges. What is a crime is concealing assets from the IRS that could pay the liability. To successfully negotiate with the IRS, you need your representation to be as aggressive as possible within the well-established boundaries of the law. There is no lying or cheating involved. Successful IRS tax debt negotiation involves proper structure, documentation, classification of assets, liabilities, income and expenses, and then making the most persuasive argument that the amount to be paid is as small as possible.
Your OVDP or Steamlined offshore "FBAR-equivalent" penalty is just like any other tax debt
If your OVDP case is closed out and your debt is not paid in full, there is nothing special about this unpaid OVDI penalty. As far as IRS collections is concerned, it is just like an unpaid 401(k) penalty. That means all available options to settle the tax debt are available.
If you have a lot of assets, but little equity: In this case, you would like want to negotiate an Installment Agreement. A lot of our clients have the assets, but a forced sale will diminish the value. Sometimes the assets are held joint or in common with someone else who doesn't have a tax problem. So stripping equity out, while possible, is less than optimal. If this is the case we would attempt to get the IRS to agree to the longest Installment Agreement term possible, to give the most flexibility and security so that the rest of their monthly obligations can be met.
If you have few or heavily encumbered assets, a volatile or low monthly cash flow, and your tax debts are fairly new: If this sounds like your position, then a Partial Payment Installment Agreement might be your best option. Essentially, what it allows is for you to pay the IRS an amount that won't full pay the obligation in the remaining time the IRS has to collect the debt (the IRS only has 10 years form assessment to collect on a debt). Similarly, your monthly payment could be as low as $0 if your financial situation supports the "Currently Non-Collectible" status with the IRS. There are some other benefits to what we call PPIA and CNC —especially when your assets large, but your liabilities larger, and I'l l talk about that next.
Your balance sheet is negative: Did you read how Dionne Warwick just filed bankruptcy for IRS tax debts? You would agree with me that Dionne Warwick is not poor, right? She likely has assets in songs, and in royalties future streams of income. Yes, she may have to reign in some expenses, but overall, she won't experience that big of a life-style change. Yet, she filed Chapter 7 bankruptcy. Why did she do this? The answer is that bankruptcy has the potential to completely wipe out personal tax debts (it does not work for trust taxes like payroll trust fund recovery penalties). The rules for discharging tax debt are not the same for discharging credit card debt. In fact, tax debt discharge rules are favorable. I am not a bankruptcy attorney, but we work with them all the time, and what I can tell you is it can really work. One caveat: you have to wait a certain amount of time to file bankruptcy. You cannot discharge new tax debts. That's why the PPIA I mentioned above is so helpful. It gets the IRS off your back until it is the proper time to file bankruptcy.
You want to get this behind you as soon as possible without bankruptcy and doubt the IRS would ever be able to collect the full amount: In this case, an Offer in Compromise may be the best solution. You can absolutely file an Offer in Compromise on your OVDI or FBAR penalty. And just because you aren't dead broke doesn't mean an Offer in Compromise can't work. We have successfully negotiated Offers in Compromise for clients who have high assets and high income. The key to this negotiation is (1) planning (2) structuring affairs legally, but also for your benefit (3) and documenting everything for the IRS' review so that they have the information they need to rule in your favor.
Case in point: Let's us suppose you got hit with a $1,000,000 offshore penalty, and if we looked at one of your bank accounts we saw that there was $1,000,000 in there. Should you pay your IRS tax debt in full? Before you answer that question, let me add some more facts to this hypothetical:
- you are currently making 1/3 of what you used to make.
- you have a sick child who has huge medical expenses and requires in-home care,
- you have no pension,
- you don't have enough life insurance
- you don't have medical insurance
- you yourself may have to retire soon
- the million dollars is all the money you have.
So sure, you could pay the IRS the entire million dollars…it is possible. But what happens after you do? You are essentially ruined and you are putting your life and your child's life at risk. So that million dollars when spread out over your remaining life isn't all that much money. As invasive as the IRS is, no one there wants to see you live in misery or be forced on to welfare if it can be avoided. So if it can be presented to the IRS that you need as much of that million dollars as possible, they may agree to settle your tax debt for — forgive the late night TV come-on — a fraction of what you owe.
OVDP penalties can be quite large, but don't let that discourage you from getting your Offshore exposure with the IRS behind you. There are many options to deal with the debt. With the help of a creative, ethical tax team, a plan you can live with is not just possible, but likely.