OVDP Opt-out Example | A Case Study for Non-Willful
OVDP is the Offshore Voluntary Disclosure Program. It is an IRS program designed by the U.S. government in order to assist individuals and businesses with getting into compliance for failing to report foreign Income, Accounts, Assets, Gifts and other Foreign Monies that were received and/or earned overseas in prior years — and not reported on a tax return, FBAR, 8621, 5471, etc.
In the years since the introduction of OVDP, the U.S. government has developed less stringent programs for non-willful taxpayers. Under the modified and updated laws, when a person (excluding businesses) was non-willful in their failure to report foreign accounts and earnings, the IRS provides an easier path to compliance called “Streamlined Filing Compliance Procedures.”
Nevertheless, many overly-aggressive or inexperienced Attorneys, CPAs, and Tax Representatives scare clients into walking the traditional OVDP path instead of the simplified streamlined version – even when it is clearly unwarranted. Why? Because these firms can bill/charge the client significantly more money in OVDP than they could for the streamlined program.
I Should Have Never Submitted to OVDP
At Golding & Golding, Offshore Disclosure is all we do; as such, we have been retained by numerous clients worldwide, who initially retained a different attorney or CPA first to represent them but then requested that we take over their case instead.
The common theme amongst these clients is that at some point during their representation, they came to the conclusion that they were wrongfully persuaded into OVDP when they should have submitted to the IRS Streamlined Program.
With these cases, it usually becomes painfully obvious that the attorney placed the client into OVDP instead of the streamlined program for no other reason other than to bill the client more money.
Do Not Lose Hope – You may Opt-Out
For individuals who are hopelessly stuck in OVDP (if your attorney/CPA submitted you into OVDP after July 1, 2014 you do not qualify for transition treatment), there is an alternative – which is called opting-out. The following is a case study of an opt out scenario involving a client who should never been involved with OVDP in the first place.
My Attorney Will Not Let me Opt-Out
Now that the attorney has billed the client significantly for OVDP, the attorney (or usually Attorney/CPAs who have little to no legal or litigation experience) are afraid of representing the client in an opt-out. This is usually due to the Attorney/CPA having no experience with any type of adversarial/examination/audit matter.
Therefore, the attorney pushes the client into accepting the 27.5% or 50% penalty – which would’ve been significantly reduced under the streamlined program.
Case Study Example: David and the OVDP Out-Out
David is originally from Korea. He came to the United States many years ago on an L-1 visa (work transfer). He was already middle-aged when he relocated himself and his family to the U.S., so he left behind a sizable retirement and savings account.
When he came the United States, David was earning U.S. salary, and under the misimpression that preparing his taxes would be no big deal; he would report his South Korean earnings to the National Tax Service in Korea and his U.S. earnings to the IRS. Therefore, he downloaded TurboTax and used it to prepare his tax returns for his “U.S. Income”
Since David had no U.S. based Dividends or Interest at the time, he did not complete a Schedule B (Interest and Dividends), and therefore did not report his foreign interest (which was substantial) on a Schedule B or 8938.
When David relocated to the United States, he properly updated his foreign banks and other investment firms of his new address; he wanted to be sure he received all of his bank statements and other financial information regarding his foreign pensions while he was in the U.S., as he did not know how long the assignment would last.
Fast-forward two (2) years later and David receives multiple notices in the mail from his different foreign banks requesting that he prove he is in FATCA compliance. Moreover, the foreign banks want David to prepare the W-9 so that the foreign bank can submit the information to the IRS.
David is confused, because he is neither a U.S. citizen nor a Legal Permanent Resident.
Substantial Presence Test
Welcome to the United States.
When the IRS wants its tax money, it will find a way to do so. One way the IRS snatches tax money from unsuspecting foreign persons is through the substantial presence test. Under the substantial presence test, when a person has resided in the United States for at least 183 days over a three-year period using a 1:1, 3:1, and 6:1 ratio test, they will magically become subject to US tax just as if they were a U.S. Citizen or Legal Permanent Resident (Click Here to learn more about the Substantial Presence Test and for some Examples of SPT).
Since David has been living in the United States full time since 2010, he will be subject to US tax just as if he was a US citizen or legal permanent resident.
David is Scared
Who wouldn’t be? David is earning a solid six-figure salary in the United States as well as having amassed a multi-million dollar savings/retirement nest-egg overseas. Unfortunately, David is wearing his fear on his sleeve, and when he begins researching and speaking with attorneys, they instantly sense his fear.
The result: an attorney has scared David into believing that unless he quickly (read: hastily and without time to fully assess the situation) enters OVDP, he could be arrested at any moment. As such, David Trusts the attorney and agrees to enter OVDP.
The Preclearance Letter is a relatively simple process and unless the person is under criminal investigation already, they will usually receive authorization to move ahead with OVDP.
David applies for Preclearance and is admitted to the OVDP program…and so the process begins.
Phase 1 – 14454 and 14457 Account Disclosure
Over the next few months, David begins preparing the applications for the initial phase of OVDP (14454 and 14457), which the attorney submits. As time progresses, the fees David has paid the Attorney have far exceeded the initial quote the attorney provided for services.
Moreover, David has conducted more research, and realized that he never had to enter OVDP in the first place. Rather, David realizes that the attorney exploited David’s unfounded fear of criminal exposure — especially when David filed and paid all of his US taxes properly, and paid foreign taxes on the earnings he had overseas (when he was required to).
As such, David would have been a perfect candidate for the streamlined program and thereby having his penalty reduced to a mere 5%.
*Once the first phase of OVDP (Forms 14454 and 14457) is submitted, the person cannot transition into the Streamlined Program (post July 2014). If a person submits a preclearance letter only and not the documents required for the first phase of OVDP, they may be able to still submit to the Streamlined Program as the IRS does not explicitly include the preclearance letter submission in the definition of ‘OVDP Submission.’
**The IRS may still preclude entry into the Streamlined Program if a person submits a preclearance letter for OVDP.
David Feels Lost and Confused
David begins to realize what the total amount of the penalty he will have to pay under the OVDP guidelines, and begins losing sleep. He’s worked hard for this money and always pays tax on the earnings he used to build the savings/retirement. Moreover, his attorney never represented to him the full nature of the penalty.
Can David Transition to Streamlined?
Unfortunately, because David’s attorney submitted him to traditional OVDP after the transition date, David does not qualify for transition treatment and must continue through OVDP.
If David does not continue with OVDP, the IRS already has all of his information and the IRS can levy even higher fines and penalties against David for failing to complete the program than it could under the penalty structure of OVDP.
David still has the opportunity to opt-out of the program. Opting out is a process in which a person submits the paperwork necessary to complete the OVDP, pays any outstanding tax and interest due on the prior year taxes (as well as the 20% penalty on the taxes due for each year) but when it comes time to pay the FBAR/8938/Unreported Asset penalty, the individual opts out.
By opting out, the individual is telling the IRS that they do not believe the penalty is fair under the facts and circumstances of this case. Prior to the introduction of the streamlined program, individuals who were non-willful had no alternative but to enter traditional OVDP and then opt-out.
These days, at Golding in Golding most Post July 2014 Opt-Outs consist of individuals who are stuck in OVDP as a result of bad advice they received from their tax attorney or CPA. While many attorneys represent that they handle these types of matters routinely, the fact of the matter is it is just one type of matter in a laundry list of different matters the firm handles.
**Noting, there is a strategy in which a non-willful individual was still enter OVDP in order to obtain criminal and audit protection, but opt out at the penalty phase to avoid the 27.5% or 50% penalty; this can be a risky strategy.
Sure, you understand that you are non-willful and suckered into entering OVDP by an attorney who is more interested in padding his bills than representing your best interests…but will the IRS believe you?
The reality is, when a person chooses to opt-out they may be subject to extremely high fines and penalties that far exceed any penalties they would have had to pay under traditional OVDP. With that said, a person with the proper facts and circumstances in their favor may be able to negotiate a much more reduced penalty and they would have had to pay under the traditional OVDP.
Opt-Out May be Your Best Option
If you have come to the decision that you were wrongfully persuaded into OVDP, you should consider opting out. If you have lost trust and faith in your current attorney, then you should retain a new attorney to assist you. You have the absolute right to terminate an attorney or firm that you no longer want to represent you, and hire whichever attorney you choose to take the reins for your opt out.
If you believe you are non-willful, and were wrongfully persuaded into OVDP, but your current attorney is not providing you any option to opt out (or you have no confidence in his or her ability to represent you), then it may be time for you to obtain a new attorney to assist you in the opt out.