Considerations in Opting Out of the OVDI

IRS has established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).

On January 9, 2012 the IRS announced the terms of the 2012 OVDI which requires that taxpayers: (1) File 8 years of back tax returns reflecting unreported foreign source income; (2) Calculate interest each year on unpaid tax; (3) Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and (4) Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.

In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

With taxpayers still facing a rather large penalty, taxpayers are torn on whether or not they should participate in OVDI or “Opt-Out”.

OVDI may not be perfect, but it is a finite way of getting beyond the fear of discovery and prosecution. Before our firm would engage in any discussion of opting-out with a client, we would first make sure that the Revenue Agent assigned to evaluate our client’s Civil Package has considered all of our arguments and positions to assure the lowest possible penalty or a taxpayer’s qualification for a lower OVDI penalty rate (such as 5% for inherited accounts).

When we know that we have done every possible within the confines of OVDI and the Revenue Agent has issued his or her final report, we would discuss then with our client the option of opting-out of OVDI.  There is much talk of opting-out but sparse data so far. The opt-out election is irrevocable and is typically made after the IRS has calculated a proposed miscellaneous offshore penalty. Keep in mind that from the time of registration into OVDI has occurred, at least a year has since past so if you have not yet registered into OVDI – registering for OVDI now still leaves much time before considering to opt-out.

From our experience, each person’s case must be looked at separately to determine if opting-out is the best option.  If you have no evidence of willfulness, the sheer numbers may make opting out attractive especially where the proposed OVDI penalty is in the hundreds of thousands of dollars.  But for those taxpayers whose proposed OVDI penalty is let’s say $80,000 or less, opting out probably can’t save you too much, especially if by opting out you end up with non-willful penalties which over a six-year period can equate to about the same amount as this $80,000 guideline amount referred herein.

From a broad perspective OVDI is predictable but opting out is much less so. As the above considerations reflect, think about your facts. Ask whether the potential risks and additional legal fees of opting out offset the potential rewards. Individual advice about the particular facts are important.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your foreign account filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.