OVDP Opt-out: Offshore Commercial Real Estate Penalty Relief


NOTE: This article was written on September 26, 2013. IRS OVDP rules have changed substantially as announced by the IRS on June 18, 2014. For updated OVDP information, click here.

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The Offshore Voluntary Disclosure program assesses a penalty on income-producing real estate on which income has not been reported. To put it another way: suppose you are a US person, you own a flat in London and didn't report that rental income to the IRS. If so, and you have entered into the standard OVDP, you must include the value of that flat in your Offshore penalty base. Because these penalties can be so high (and actually more than the equity in the property), many US taxpayers who would otherwise use the Offshore Voluntary Disclosure Program aren't coming clean. The good news is that for those considering entering into the program or looking at a 906 Letter in disbelief,  the OVDP opt-out procedure can offer some pretty dramatic relief. Here are three reasons why:


OVDP Opt-out still gives you protection from criminal prosecution.

We say it a lot: when you use the OVDP opt-out, you aren't opting out of the whole OVDP, you are only opting out of the standard penalty structure of 27.5% of the highest value of your unreported offshore income producing assets. All the criminal protections still apply!


OVDP Opt-out reduces your penalty base.

One of the bizarre things we have seen is that the IRS is not taking into account encumbrances such as mortgages on property when calculating the penalty base. That is, if you have a flat in London worth one million pounds, but it has a mortgage of one million pounds against it, the IRS is still going to assess your penalty on that million pounds!  This is absolutely nuts. But by opting out, you do not need to subject yourself to these calculations at all.


There are no FBAR penalties on real estate.

There are no FBAR penalties on real estate. So when you opt-out, the FBAR examiner has no penalty base to look at. This is because there is no requirement that you report any individual ownership you have in real estate — commercial or not — to the IRS. If you opt-out and have bank accounts, the IRS can still assess FBAR penalties on those. If you opt-out and only have Real Estate, there is just nothing to assess FBAR penalties against. True, the IRS can assess the normal audit penalties, but those are always a fraction of what FBAR and other offshore penalties are, which are based on value, not income.


Confused about FBAR penalties and OVDP Opt-out?

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