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 — although this 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:

You 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.

How are FBAR Penalties Assessed?

If you opt-out, you are subject to a regular “examination/audit” analysis of your penalty assessment by the IRS Agent.

The following is a breakdown summary from information published by the IRS:

4 Civil Penalties for FBAR Violations

Here are four civil penalties available for FBAR violations:

– 31 USC 5321(a)(6)(A).

– Pattern of negligent activity. 31 USC 5321(a)(6)(B).

– Penalty for non-willful violation. 31 USC 5321(a)(5)(A) and (B).

*Note: Although the term “non-willful” is not used in the statute, we use it to distinguish this penalty from the penalty for willful violations.

– Penalty for willful violations. 31 USC 5321(a)(5)(C).

A filing violation occurs at the end of the day on June 30th of the year following the calendar year to be reported (the due date for filing the FBAR). A recordkeeping violation occurs on the date when the records are requested by the IRS examiner if the records are not provided. A civil money penalty may be imposed for an FBAR violation even if a criminal penalty is imposed for the same violation. 31 USC 5321(d).

Practice Pointer: The June 30th Day is Outdated

It is important to note that until 2017 (when tax year 2016 FinCen 114 reporting was due), the due date for reporting foreign accounts was June 30. Currently, the reporting date is the same date as your tax return due date – and typically the IRS issues automatic extensions so that it is not due until the last day to file your tax return on extension is due (October if you reside in the U.S.0 – but you need to check this each year.

For violations occurring after October 22, 2004, a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. 31 USC 5321(a)(5)(B).

The penalty should not be imposed if:

  • The violation was due to reasonable cause, and
  • The person files any delinquent FBARs and properly reports the previously unreported account.

Examiners have discretion in determining the penalty amount and should use the mitigation guidelines in making their determinations.

Examiners should take the facts and circumstances of each case into account when determining if a warning letter or penalties that are less than the mitigation guidelines are appropriate. The purpose of FBAR penalties is to promote compliance with the FBAR reporting and recordkeeping requirements.

Practice Pointer: Reasonable Cause and Filing Past FBARs

This is a very important point. There is a case, Jarnagin, in which the court upheld penalties in a situation in which the individuals received bad advice from their CPA. Essentially, the CPA was not aware of the specific requirements and the court held that taxpayers cannot rely on an uninformed CPA for not filing.

Many people took this to mean that you can no longer rely on reasonable cause to get out of penalties, but as of now that is incorrect. What is important to note from that case is that the court mentioned that the main reason that the Court would not consider reasonable cause was because Jarnagin never went back to file the old FBARs.

Therefore, if you are making a reasonable cause submission, please note you still have to file the late/old FBAR(s).

Practice Pointer: The $10,000 “FinCen 114 is Outdated”

As provided by the IRS: For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2,2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause.

Recommended Penalties – Nonwillful Violations

– After May 12, 2015, in most cases, examiners will recommend one penalty per open yearregardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.

– For multiple years with nonwillful violations, examiners may determine that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only.

– For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner’s workpapers must support such a penalty determination and document the group manager’s approval.

– In no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.

Penalty for Willful FBAR Violations

– For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C). For cases involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful.

– After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.

Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate

– Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval.

– If an account is co-owned by more than one person, a penalty determination must be made separately for each co-owner. The penalty against each co-owner will be based on his her percentage of ownership of the highest balance in the account. If the examiner cannot determine each owner’s percentage of ownership, the highest balance will be divided equally among each of the co-owners.

Willful Penalty Mitigation

The statutory penalty computation provides a ceiling on the FBAR penalty. The actual amount of the penalty is left to the discretion of the examiner. IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons. Exhibit 4.26.16-1.

Mitigation Threshold Conditions

For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.

For violations occurring after October 22, 2004, the four threshold conditions are:

-The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.

-No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.

-The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews; and the taxpayer back-filed correct reports).

-IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.


Keep Your Head Up

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