OVDP Opt-Out or the IRS Streamlined Program – What’s the Difference?
Recently, we spoke with a client who believed they had received OVDP advice from an experienced international tax lawyer.
In speaking with the client, she explained to us that the prior attorney told the client that she should enter OVDP and then opt-out instead of entering the Streamlined Offshore Disclosure program – since it is the same thing except under OVDP, the person receives protection from criminal prosecution, with the reduced penalty.
Not only is this analysis incorrect (The IRS can also Increase the penalty under Opt-Out Procedures), but it could lead an individual who is otherwise non-willful and qualifies for the streamlined program stuck in OVDP — with intense fines and penalties if the opt-out does not go properly.
- 1 OVDP Opt-out vs. Streamlined
- 2 Opt-Out is NOT Always the Best Choice
- 3 Do Other People Wish For Your Downfall?
- 4 The Benefits of the IRS Streamlined Program
- 5 Opting-Out vs. Streamlined
- 6 Our Advice – Vet Out Your OVDP Lawyer
- 7 You Can Always Change Attorneys
- 8 Golding & Golding, Board-Certified Tax Law Specialist Team
OVDP Opt-out vs. Streamlined
At the current time, we are representing several clients wherein we were contacted by the client while they were being represented by inexperienced counsel. The going theme seems to be these other attorneys do not handle enough of these types of cases to understand the nuances, and therefore blindly submits the client to OVDP, without properly explaining the process to the clients.
Thereafter, the individuals conducts their own research, and only then realize the gravity of the situation. Some of these situations are so egregious, that we have been referred clients who would have qualified for delinquency procedures or reasonable cause but are now finding themselves stuck in OVDP.
Beyond being attorneys, we are human beings. On any level, it is heart-wrenching to see an elderly person or couple having to fight for their lifetime of savings as a result of receiving irresponsible bad advice and being thrown into OVDP — with opting-out being their only chance for a reduced penalty.
Opt-Out is NOT Always the Best Choice
Sometimes, opting-out is a great idea. Depending on a person’s specific facts and circumstances, coupled by the person’s risk management level, potential penalties — and related issues which could reduce the penalty without an opt-out — such as making a mark-to-market election or qualifying for FAQ 55 removal of a portion of a penalty — the Opt-Out may work well.
Other times, it is not a great idea. For example, if a person has a somewhat shady US business and possibly may not completely be on the up and up in the first place – agreeing to open yourself up for an eight year audit is not necessarily the best strategy.
Do Other People Wish For Your Downfall?
When a person has made statements to other individuals such as ex-spouses, ex-business partners, or CPAs in which it will become clear to the IRS agent that the individual is willful – it is also not worth it to try to gamble a reduced penalty. Why? Because you really do not know how far into the investigation the IRS agent is going to want to push, and whether the audit is really a reverse Eggshell Audit in which the Agent is just waiting for you to trip up.
Moreover, who is the agent auditing you? Is it a new agent, or an experienced agent who knows all the secret “hiding places.” Is it someone gunning for promotion, or someone with one foot out the door towards retirement. In other words, opting out requires a complex analysis individualized to each persons set of facts and circumstances.
The Benefits of the IRS Streamlined Program
Under the streamlined program, a person can sidestep or circumvent traditional OVDP, and submit directly to the streamlined program instead. By doing so, they only have to amend three years of tax returns instead of eight, and submit six years of FBAR (FinCEN 114) instead of eight.
Moreover, the penalties are reduced and even wave depending on whether a person qualifies as a foreign resident.
The single most important aspect of a streamlined disclosure is to meet the definition of non-willful. As we have mentioned before, there is no concrete definition of the term non-willful, but common sense dictates the analysis. In other words, if you truly had no idea that you had a reporting requirement, and did not have a tax professional ask you, or educate you about foreign account reporting before filing your prior returns, there is a good chance you will qualify as non-willful.
It does not matter how much money you have (usually) and it does not matter how much income you have one report (again, usually). We preface this, because as shown in a recent case involving FBARs and Penalties the more money you have and depending on your level of business acumen, the more chance the IRS will expect that you retain an experienced tax professional to prepare your taxes.
But, even in that case the court held that the individual was not willful (even though the near max penalties under the non-willfulness aspect of the statute were issued).
Opting-Out vs. Streamlined
In all reality, these should not be to competing decisions. The reason why is because opting out may sound better in the brochure. Once you and and Experienced Offshore Voluntary Disclosure Program Lawyer have reviewed your information in detail, you may come to the sobering realization that even though you are non-willful, and opt out is too risky (based on other issues).
Therefore, by having entered OVDP, you are now stuck in OVDP. This seems to be one important concept which is missed by many beginner and inexperienced “international tax lawyers.” After a person has submitted beyond the preclearance letter, they do not have the opportunity to back out of OVDP.
Thus, if you get cold feet about opting out, you cannot now switch to the streamlined program, no matter how unfair it is.
On one occasion, prior counsel’s actions were so egregious, that the IRS Agent we were working with after taking over the case, was actually batting on behalf of the taxpayer. We laid out the facts in detail, and she actually pushed to have the case transferred to the streamlined program – but unfortunately IRS Trial Counsel explained that it is a precedent they are not willing to set, and therefore the cases moving towards opt-out. In this particular case, the facts could not have been anymore in favor of our client, but the IRS just will not budge – once you are in, you are in. That is just one of more than a dozen examples of current cases we’re trying to resolve as a result of bad lawyering.
Hopefully this will change in the future, so that Taxpayers are not held accountable for bad lawyering.
Our Advice – Vet Out Your OVDP Lawyer
Make sure you speak with the attorney who will be handling your case. As you can see from the more experienced OVDP and streamlined disclosure lawyers, we all have advanced degrees with Masters in Tax Law (LL.M.) and we all have either the designation.
Make sure you discuss in detail how the case is going to be handled with the attorney. Make sure you have an opportunity to speak directly with the CPA or EA (if it is not the attorney being duly licensed), and ask what happens if you do not agree with the position taken by the CPA or EA, or do not like the Accountant’s work product? Are there extra fees?
It is important that you vet out the experience of both the tax attorney and the tax professional (CPA/EA/Accountant) – if they are using one – so that you have a confidence level regarding your entire submission.
We have been finding lately that “more senior attorneys” who do not have significant offshore disclosure experience are trying to jump into the Offshore Disclosure had first based on experience they have in other areas of law only to give absolutely terrible advice to clients. They then try to cut costs by referring the Accounting/CPA work to the least expensive person they can find, to dismal results.
Therefore, be sure to ask the attorneys how many cases they’ve handled in the last year, two years or five years? You should ask them difficult questions regarding your specific case so that you have an understanding that they understand your case and how to proceed. It is not the time to be shy.
In reality, if your attorney is not also handling the tax portion of the submission, then you will most likely have little to no say in choosing the tax preparer, communicating with the tax preparer, or disagreeing with the tax preparer.
You Can Always Change Attorneys
This is another very important fact to keep in mind. If you have lost confidence in your attorney, you should consider seeking out other counsel the best assist you. You should interview multiple Attorneys until you find the one that fits you best.
Golding & Golding, Board-Certified Tax Law Specialist Team
Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.
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