Since the "opt-out" process was first introduced in the 2011 Offshore Voluntary Disclosure Initiative (OVDP/OVDI), we have helped countless US taxpayers and tax professional understand one of the most confusing aspects of the current OVDP, "the opt-out." Here is our OVDI/OVDP Opt-Out FAQ to answer the top questions that we are routinely asked.
1. Will the IRS prosecute me criminally if I opt-out of the OVDP?
No. The reason why there is confusion is that when you opt-out of the OVDP, you really aren't opting out of the OVDP. What you are actually opting out of is the OVDP standard penalty cap. Under the standard cap, you pay one penalty either (a) 12.5% of account value, Offshore "FBAR equivalent" penalty for accounts under $75,000, or (b) and 27.5% for accounts over $75,000.
That standard 12.5%-27.5% penalty cap is all that you are "opting-out" of. You are not opting out of the entire program at all. You can NOT be charged criminally for opting-out of the OVDP.
2. Will the IRS charge me more than the standard 12.5% or 27.5% Offshore penalty if I opt out?
It's possible, but we haven't seen it yet. The IRS has told us that they DO NOT want to punish anyone who using the OVDP. These are, in the IRS' eyes, the people doing "the right thing." We could see the IRS charging someone more, but really, only if that person was giving the OVDP unit a hard time. For someone who has a legitimate reason for opting out — that seems very unlikely to us and it is something we have yet to encounter.
3. How many successful OVDPs opt-out have you done?
As far as our cases submitted in 2012, a handful have been approved as the date of this blog. The opt-out program is fairly new, and the IRS rumbles incredible slow, like a glacier. The OVDP unit seems favorable to our claims and appears to be following the guidelines, but again, there are so few that have closed out. The reason: The IRS is trying to centralize all opt-out decisions for consistency, so there appears to be a queue that many of our cases are in for approval of the 5% penalty.
Would you believe we still have cases we filed in December of 2009 that are still pending in opt-out? Additionally, we have cases where were are trying to argue for a 0% penalty. The IRS is moving incredibly slow on these cases. The risk of FBAR litigation is high, and the facts are so favorable to our clients that the IRS is treading very carefully to come up with a consistent policy.
The other reason for the delays is that the IRS totally overestimated how many intentional tax evaders would use the program, while simultaneously underestimating how many innocent or at worst negligent filers there are — especially ex pats, dual citizens, Visa holders and resident aliens.
4. What if I disagree. Can I appeal?
Yes. You can appeal any OVDP penalty. Whether within the OVDP program or out, but inside the program is a much more favorable ground. Outside the program, the law lets the IRS assume willfulness and can charge multiple 50% penalties that can wipe out your entire net worth in seconds. And the IRS has done this, and threaten to do more.
5. For small cases, OVDI seems like overkill. Why don't I just do a 'soft' or 'quiet' disclosure?
The decision to enter into the program is entirely yours. Honestly, the biggest threat of not entering into the program is the risk of an FBAR audit. Not criminal charges (although it is possible); but if caught in an FBAR audit, the results could be disastrous.
A 'soft' or 'quiet' disclosure to us, makes no sense. The IRS claims they will track down all of those who have made soft of quiet disclosure.
Many times we find the law unfair. Our advice is to follow the rules, even though it is tough to accept, but then get political about it and contact Congress to demand a change…and a refund!
6. If I made a soft disclosure can I still use the OVDP?
Yes. And you should. The IRS has detected 10,000 people it suspects of making a soft disclosure. And these are only the accounts over $1,000,000. There are a lot more under $1,000,000.00.
7. I started, or my CPA started my OVDP. But I am getting uncomfortable. I want to get a lawyer who specializes in this. Can you or another OVDP law firm take over for me?
We think that getting an OVDP specialist is critical for your opt-out. One thing we won't recommend is going with someone who does not focus on doing this type of work. If you'd like to set up a complimentary consultation to see if we can assist you, contact us. We can prepare your disclosure, or give you a second opinion on an already prepared disclosure.