Many of our past, present, and likely future clients wait to see how the state of OVDI/OVDP opt-out shapes up in coming months and years. This opt-out option, unavailable during the original 2009 program, was first implemented in 2011.
Should you use the OVDI/OVDP opt-out or not?
This is an area where you need to be thinking about the risks, and have some basis to calculate the rewards. You need to think about if you have reasonable grounds, or if you should just pay the offshore penalty and be done with it.
When you opt-out of the OVDP, you opt-out of the standard penalty structure. You are not increasing your chances for any criminal prosecution by opting out.
Consider this: Even though we have concrete data for our Offer in Compromise success rate, we never promise a tax resolution client of ours that an Offer will be accepted. We simply use our knowledge and experience to get the best result possible. If we can't promise a result for a program that has been around for a long time, we certainly can't promise a particular opt-out result for a program that's not even as old as a really good cheddar cheese.
Some OVDI/OVDP opt-out procedures to consider:
During the opt-out process the case is assigned to an IRS special examiner. We have spent some time with some of these examiners who are honestly informative. Here’s what we learned:
- There is literally, not just figuratively, a separate FBAR examination and tax return examination—essentially two different audits in one. Since an IRS agent has to justify opening an FBAR examination by law, even in cases like this, this adds a level of complexity to the case. Their FBAR examination must be approved by superiors, even though it seems like it should be “automatic” for OVDP cases. This adds time to the case as well.
- Assessing the FBAR penalty is easy for the Treasury. But — and here is the big issue: This FBAR penalty debt is unlike a tax debt. In order to collect on that separate FBAR penalty assessment, the Treasury Department must sue in Federal District court. This is good and bad. It's bad, because the normal IRS lines of tax appeal and tax court are not open. It's also bad because a civil suit is expensive to defend against. But it is also a good thing because there is a huge likelihood that an opt-out taxpayer will fight back tooth and nail. This risk analysis certainly goes to the IRS attorney that assesses the FBAR penalty. In these cases that the IRS has no leverage of criminal charges. The opt-out still protects taxpayers from criminal charges. The Treasury Department, if the case does not settle, will have to prove to a jury, by a preponderance of the evidence that it is fair to impose significant penalties for failing to file a form none of them ever heard about.
- Many of the agents have had a crash course as painful and quick as many taxpayers', and they are desperate to get things done to everyone’s satisfaction as much or more than practitioners or their clients. There are so many procedural and bureaucratic hoops to jump through that they are also intimidated.
Expect a lot of waiting for your OVDI/OVDP opt-out result.
An OVDP with an opt-out takes a lot of time; the IRS is inundated with disclosures. Here's one example: We experienced real progress for the first time on a case from 2010 just last month.
If you need assistance with any offshore disclosure reporting, contact us to set up a complimentary, confidential consultation.
