201701.18
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Opting Out of OVDP – IRS Offshore Penalties | 3 Opt-Out Examples

Opting Out of OVDP - IRS Offshore Penalties | 3 Opt-Out Examples by Golding & Golding

Opting Out of OVDP – IRS Offshore Penalties | 3 Opt-Out Examples by Golding & Golding

Opting Out of OVDP – IRS Offshore Penalties | 3 Opt-Out Examples

Opting-Out of OVDP

Under certain circumstances, opting-out of OVDP is preferred. Examples of situations in which OVDP opt-out is preferred:

  • Lopsided penalty (Income vs. Reporting)
  • Submitted to OVDP by inexperienced counsel
  • Do not qualify for Transitional Treatment

What is an OVDP Opt-out?

In a nutshell, OVDP is the traditional Offshore Voluntary Disclosure Program. Even if you are in the program, you may still opt-out of the program “penalties” and seek a penalty reduction.

As with anything involving the IRS, it may come with some risk — but oftentimes not as much risk as you have been led to to believe by inexperienced counsel.

The majority of individuals who are non-willful in their failure to report foreign accounts, foreign investments, foreign assets, and/or foreign insurance policies will enter the Streamlined Program instead of OVDP.

OVDP vs. Streamlined Program

Depending on how much research you have conducted (read: worried yourself sick), you may have learned that when it comes to IRS Offshore Voluntary Disclosure, you have two main options – OVDP or the Streamlined Program

For the most part, OVDP is reserved for individuals who were Willful a.k.a. intentional/deliberate in their failure to report foreign accounts (but not always).

Alternatively, if an individual was not willful, then they will enter the Streamlined Program which has relaxed reporting requirements and a much lower penalty base – which may even be waived when a person qualifies as a foreign resident.

                         

But You’re Already Stuck in In OVDP…

For individuals who submitted to OVDP prior to July 2014, there are specific protocols in place called the IRS Transition rules to help you move over to the streamlined program — if you qualify as non-willful. Since the streamlined program (or the current modified version of the) was introduced in July 2014, if you submitted to OVDP after July 2014 then you do not qualify for the transition rules..

Nevertheless, now that you are stuck in OVDP, the big question is whether should you opt out. By opting out of OVDP, you are asking the IRS to reduce the penalty (which is either 27.5% or 50% depending on the facts and circumstances of where you keep your money).

Is Opting Out Safe?

It depends. When you opt out, you are risking that the IRS is going to penalize you more than they would under the regular program.. Moreover, if you are opting out after submitting to OVDP post July 2014, the IRS may believe that the only reason you are doing so is to avoid the penalty — which may be a legitimate reason based on the facts and circumstances of your case and whether the majority of unreported money is “Income” or Accounts/Assets”

The following are three examples of when you may still consider opting out of OVDP:

Your Received Bad Legal Advice

Some attorneys are willing to take any case they can to pay the bills. This is true, even when an attorney has literally little to no experience in an area of law. It is actually not uncommon for attorneys with little to no international tax background to take this type of case, because they think it is easy. Unfortunately, there are so many nuances to this area of law, that if the client utilizes an attorney who does not have the proper experience, they may find themselves stuck in OVDP — when they should have never submitted to the Streamlined Program.

These types of attorneys will make statements to the client such as “unless you go OVDP you will not obtain criminal protection,” and “unless you go OVDP, you could end up in jail.”

Now, if you were willful and were intending on defrauding the US government then you should go OVDP. But, if you are non-willful and the only reason you are choosing OVDP is because the attorney scared you into OVDP, you may consider opting out. The reason the attorney pushed you into OVDP is usually one of two reasons:

  1. The attorney did not understand the program; and/or
  2. The Attorney was looking for a big payday (Higher Attorney Fees under OVDP)

If you believe you received bad legal advice, you should consider obtaining new counsel and opting out. In situations such as these,  we have found in our experience that even the IRS may understand your plight — and agreed to significantly reduce your penalties.

You Submitted a Preclearance Letter Only

The IRS has stated that if you started the OVDP process (Submitted to OVDP), you cannot turn-tail and submit to the Streamlined Program. But, the IRS has not yet stated that if you submit a preclearance letter only (not the subsequent phase of the 14454 and 14457), that you cannot switch gears and instead submit to the Streamlined Program. In other words, if you submitted a Preclearance Letter only, you may be able to still apply to the Streamlined Program, but you should speak with an experienced IRS offshore voluntary disclosure program attorney before making any further communications to the IRS.

You Have Good Facts to Warrant an Opt-Out

Maybe you were willful, but the facts and circumstances somehow justify the willfulness. This is not the type of circumstances in which we can provide examples, but just to know that even the IRS has stated that depending on certain facts and circumstances such as the amount of income generated versus the value of the accounts and assets — the 27.5% or 50% penalty may simply be too high. In these types of circumstances, you may be better off opting out, but it will require a comprehensive analysis by highly experienced offshore disclosure where to go over and review the pros and cons of the situation.

How to Opt-Out

At the completion of the Offshore Voluntary Disclosure Program process, you will be asked to sign a closing letter (Form 906). If you sign the document, it essentially means you have reached the end of the line. In other words, you are accepting the terms of the OVDP. Even if you want to remain in OVDP, you have the option to essentially not sign the letter (while still remaining in OVDP) and opening yourself up for audit.

Depending on the facts and circumstances of your case, a voluntary IRS Audit is not for the faint of heart. Still, in many situations, the opt-out may be a better, calculated risk.

Keep Your Head Up

In other words, never lose hope, AND there is always time to switch Attorneys and retain experienced counsel.