OVDP Penalty Opt-Out – Fighting IRS Offshore Disclosure Penalties
- 1 Referrals for OVDP Opt-Out
- 2 What is Opting Out?
- 3 Experienced International Tax Lawyer
- 4 OVDP Opt-Out
- 5 What is OVDP?
- 6 Opt-Out Procedure Basics
- 7 DOT and IRS Guidance on Opt-Out
- 8 OVDP FAQ – Summary
- 8.1 Can My Immigration Status Be Impacted by OVDP?
- 8.2 My Spouse Does not Want to Enter OVDP
- 8.3 We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
- 8.4 There is No Passive Income Tax in The Country with My Accounts
- 8.5 The Unreported Money does not belong to me?
- 8.6 My Business Never Reported Foreign Accounts
- 8.7 My Business is Held as a Foreign Holding Corporation
- 8.8 The Business is not Under my Name
- 8.9 I did not report my Foreign Retirement Account
- 8.10 I received a FATCA Letter, What Should I do?
- 8.11 Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
- 8.12 I Sold Foreign Property and Transferred Money into a Foreign Bank Account
- 8.13 Unreported Income from a Foreign Rental Property
- 8.14 What if I have an Unreported Foreign Gift (Form 3520)?
- 8.15 What if I Failed to Report a Foreign Trust (Form 3520-A)?
- 8.16 What if I Never Reported my Foreign Business Interest (Form 5471)
- 8.17 I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
- 8.18 I Opened and Closed Accounts Several Bank Accounts
- 8.19 I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
- 8.20 What is GATCA/CRS?
- 8.21 What does “Under Examination” mean?
- 8.22 Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
For some individuals, the OVDP penalty is just too much to bear.
There are many legitimate reasons why a person would opt-out, and oftentimes it is because they were rushed into OVDP by another firm, who is now not willing to help the client after having been paid in full by the client.
Since 2014 and the introduction of the Streamlined Program, there are less people entering traditional OVDP (since before the Streamlined Program, even non-willful individuals were forced to go OVDP, and then “Opt-Out” later when it was time to pay the penalty), but this had lead to a new problem (see below).
Unless a person intentionally enters OVDP with the intent to opt-out, the two most common scenarios for opting out is:
- The prior firm did not explain OVDP properly to the Client; or
- The prior firm did not explain the OVDP Penalty to the Client.
Both of these reasons are unacceptable.
Referrals for OVDP Opt-Out
As the IRS is finally catching up on their OVDP cases from many years ago, many individuals we are representing in the opt-out scenario (post-2014) come to use after using a law firm that they are now unhappy with. It is usually as a result of the other firm not properly explaining the OVDP process to the clients, and/or failing to summarize what the OVDP Penalty will be further down the line.
Alternatively, the firm now informs the Taxpayer that “If you opt-out, you are going to jail.” Not only is this unfair, and wrong – but it is unethical in that most of the individuals who come to us with this story used the same few group of Lawyers or Lawyer/CPA firms (with the client being upwards of 80+ years old) who seem to get a kick out of scaring/fleecing elderly clients. These firms fail to explain to the Client that OVDP Opt-Out is an approved method for someone seeking a penalty reduction.
Once the Client fully understand OVDP, and they no longer want to continue in OVDP (they believe they were non-willful but do not qualify for transitional treatment), their only option is to opt-out (absent being removed from the program against their will, with the IRS going after them for even more fines and penalties).
What is Opting Out?
As provided by the IRS: If the offshore penalty is unacceptable to a taxpayer, that taxpayer must indicate in writing his decision to withdraw from or opt out of the program. Once made, this election is irrevocable. An “opt out” is an election made by a taxpayer to have his case handled under the standard audit process. Some taxpayers may prefer this approach; in some cases the results under the OVDP may appear too severe given the facts of the case. In other cases, this is less clear. In these less clear cases, the IRS will protect its interests and the integrity of the voluntary disclosure program. In these cases, the IRS will likely conduct full scope examinations.
We anticipate that opting out will be appropriate for a discrete minority of cases. Moreover, to the extent that issues are found in a full-scope examination that were not disclosed by the taxpayer, those issues may be the subject of review by Criminal Investigation. In either case, opting out is at the sole discretion of the taxpayer and the taxpayer will not be treated in a negative fashion merely because he chooses to opt out
The specific procedures for opting out are set forth in a separate guide titled Opt Out and Removal Guide for the 2009 OVDP, 2011 OVDI, and now the OVDP.
Taxpayers are reminded that, even after opting out of the Service’s civil settlement structure, they remain within Criminal Investigation’s Voluntary Disclosure Practice. Therefore, taxpayers are still required to cooperate fully with the examiner by providing all requested information and records and must still pay or make arrangements to pay the tax, interest, and penalties they are ultimately determined to owe. If a taxpayer does not cooperate and make payment arrangements, or if after examination, issues exist that were not disclosed prior to opt out, the case may be referred back to Criminal Investigation.
Experienced International Tax Lawyer
If you, your business, your foreign trust or estate has unreported accounts and the your actions were “willful” – or you are not sure if you were willful – you should consider speaking with an experienced International Tax Lawyer.
The opt-out procedure has become less common ever since the Internal Revenue Service and Department of Treasury introduced the modified Streamlined Offshore Disclosure Program for non-willful applicants. Nevertheless, for those who may have not heard of the streamlined program, do not qualify for the streamlined program, or did not transition into the streamlined program from OVDP — opting out is the only option to try to reduce penalties.
What is OVDP?
For some people, the Offshore Voluntary Disclosure Program is a get out of jail free card. It is an opportunity for individuals, estates, and businesses who knowingly/willfully failed to disclose and report foreign accounts and offshore income to come-clean, with little chance of IRS prosecution.
Nevertheless, the penalty structure behind OVDP is so intense that for individuals who may be on the cusp of willful or non-willful – but enter OVDP anyway – the OVDP penalty structure may prove to be too much.
For example, if a person had $1 million overseas that was unreported in a non-bad bank and only generated $10,000 a year in income, the person would still have a minimum FBAR penalty of $275,000; if it was in a “Bad Bank” the penalty would be $500,000.
Opt-Out Procedure Basics
OVDP FAQ 49 Question: If the taxpayer and the IRS cannot agree to the terms of the OVDP closing agreement, will mediation with Appeals be an option with respect to the terms of the closing agreement?
OVDP FAQ 49 Answer: No. The penalty framework for offshore voluntary disclosure and the agreement to limit tax exposure to an eight year period are nonnegotiable terms under the OVDP. If any part of the closing agreement is unacceptable to the taxpayer, the taxpayer may opt out and the case will be examined and all applicable penalties will be imposed (see FAQ 51). After a full examination, any tax and penalties imposed by the Service may be appealed, but the Service’s decision on the terms of the OVDP closing agreement may not be appealed.
DOT and IRS Guidance on Opt-Out
The Department of Treasury issued a memorandum a few years back detailing the concept of opt-out.
Essentially, once the opt-out occurs, the taxpayer cannot go back and re-enter the penalty structure. This is important, because for many taxpayers, they do not understand the ramifications of opting out, and the possible exposure they may face, such as failure-to-file penalties, failure-to-pay penalties, fraud penalties, and more.
When an applicant does not opt out, and basically goes along with the program – they resign themselves to paying the penalty and essentially purchasing a “Get out of Jail Free” card. They can sleep easy with the idea they have bought themselves out of a possible audit (involving foreign accounts and being subjected to penalties for FBAR, 8938, 3520, 5471, 5472 8621) or criminal investigation and prosecution.
For those that chance the opt-out, they will be subject to much more intense scrutiny for the offshore accounts and income. Moreover, it is impossible to know which particular agent you will be assigned, and what level of scrutiny the agent will enforce against you and your foreign accounts.
It would help for taxpayers to have a comprehensive understanding of OVDP before moving forward with an opt out.
As such, below please find a summary of OVDP followed by link to a comprehensive OVDP Frequently Asked Questions as authored by Golding and Golding:
OVDP FAQ – Summary
We have put together a basic summary of key issues individuals have to worry about when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focused more on the technicalities of qualifying for the program. Our summary will provide you more of the “ins and outs” of the actual application for individuals who are unsure of which accounts should be reported, and how entering OVDP can impact their legal status — and freedom.
In the end, if you were willful and you have foreign accounts that are unreported (especially if you are in a FATCA Agreement Country) or bank with a FFI (Foreign Financial Institution) that is reporting (and even more so if your money is in a Bad Bank), you should consider retaining an experienced OVDP lawyer and entering the program.
Can My Immigration Status Be Impacted by OVDP?
Yes, depending on your current status and future intended U.S. legal status, an OVDP application may have an impact. Under some circumstances it may hurt your status, and under other circumstances it may actually benefit your status.
Applying for Citizenship
Your immigration status can be impacted for several reasons. As a general answer, your immigration status can be impacted due to the “willfulness” presumed by applying for OVDP. When a person enters OVDP (as opposed to the IRS Streamlined Program), they are acknowledging that they were willful and/or intended to evade tax.
Therefore, if you are a Legal Permanent Resident or other Visa holder, then there is the concern that if you want to apply for Legal Permanent Residence Status (“Green Card”) or U.S. Citizenship, when you are completing your N-400 form and it asks whether you have ever committed a crime, you would have to include the tax issues as a crime. Technically, willfully and/or knowingly not reporting your foreign accounts is a form of tax fraud and tax evasion.
Deportation or Removal
If you are applying for OVDP and you are granted admission into the program, chances are you will not be criminally prosecuted and therefore you would not be deported or removed if your Foreign Bank reports you. Moreover, once your OVDP application is complete and you are approved (and you submit the OVDP Closing letter) it may facilitate obtaining citizenship if that is the endgame you are seeking.
*If you are rejected for OVDP, it could lead to Deportation or Removal, but that is a fact-based analysis depending on the specific circumstances of your case.
My Spouse Does not Want to Enter OVDP
It does not take two to tango when it involves OVDP. The IRS is more than willing to accept a one person OVDP application. Even if your prior tax returns were submitted married filing jointly MFJ, it does not change the fact that one spouse (or one former spouse) has the ability to submit to the program, even if the other spouse will not comply.
It is a much more complicated process, but if you happen to be married to a tax fraud then it is probably in your best interest to consider entering the program while making a dual application for Innocent Spouse as opposed to playing the wait-and-see game for two reasons:
- You never know when the IRS is going to strike – and that can have a major impact on your financial status; and
- You never know how sneaky your spouse, and especially a prior spouse may be – and the first person to go to the IRS usually gets the best deal (aka “first to squeal, gets the deal“)
We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
Again, the IRS does not care if you are no longer married and the prior spouse will not cooperate. If you want to go into the IRS and disclose these accounts — then you have every right to do so.
If you were unaware of your spouse’s foreign assets during the marriage, and/or were unaware of the requirement to report the assets, and/or the money was not yours, then there are other options you may consider before making a full OVDP application.
**Before making any affirmative representation to the IRS you should consider speaking with an experienced OVDP Lawyer.
There is No Passive Income Tax in The Country with My Accounts
Unlike nearly every other country on the planet, the United States taxes US citizens, Legal Permanent Residents and Foreign Nationals Subject to U.S. Tax (Substantial Presence Test) on their worldwide income – despite where they are residing when the income is earned. Thus, merely because you may have your money in Singapore, Taiwan, Hong Kong or another country that does not tax interest income, it does not mean that the United States loses its chance to tax your money.
The Unreported Money does not belong to me?
In many countries, it is not uncommon to have children listed on the financial accounts of the parents – even though the children ”really” have no right to the money. The United States understands this concept and therefore created a different program for non-willful individuals, which is called the Streamlined Program. Moreover, since none of the money belongs to you, you should be able to waive any penalty that would otherwise have been levied against you.
My Business Never Reported Foreign Accounts
Under U.S. law, as long as the business accounts meet certain threshold requirements (more than $10,000), you are required to report these accounts on your annual FBAR (Report of Foreign Bank and Financial Account Statements). It does not matter that the accounts are being held under business account name. If you are an owner of the business and have access to the money, then technically you are supposed to report these accounts to the United States.
My Business is Held as a Foreign Holding Corporation
The IRS knows all of your tricks. Whether your money is being held in a foreign corporation, a foreign holding Corporation, a British Virgin Islands company (BVI), a Cayman Islands company, a Maltese company – it does not matter. If the foreign financial institution where you hold the bank accounts has a US address or any information regarding the US owner on the account on file, chances are that under FATCA, the financial institution is going to err on the side of caution and report the account.
The Business is not Under my Name
Depending on how sophisticated your foreign business and tax planning was, you may have foreign corporations that are not under your name, but to which you have signature or other authority over accounts at the bank – which are under the name of the business. Due to the global priority of promoting “financial transparency” in accordance with FATCA and CRS (Common Reporting Standards), there is a significanrtly increased chance that the corporate veil will be lifted and you will be exposed.
I did not report my Foreign Retirement Account
You are required to report your foreign retirement accounts (some restrictions apply, but it is better to not leave anything to chance). When it comes to foreign retirement accounts, it can get a little more tricky because if the retirement account was a US 401(k) then chances are you would receive deferred tax treatment. Thus, if you did not receive any benefits from the foreign retirement account (especially any withdrawals) then you may not have been willful by not reporting the account. This is because it is understandable to think you would not have to report a foreign retirement account until any distributions were made to you.
***You should speak with an experienced OVDP lawyer on this issue.
I received a FATCA Letter, What Should I do?
If you received a FATCA letter from your foreign bank, then you really need to take action. That is because the bank is waiting for you to reply to both confirm compliance with IRS tax law, as well as indicate whether you qualify for a W-9 or W-8 BEN.
If you are a US taxpayer then you will have to complete the W-9, which means you will be subject to IRS tax reporting, And, if the bank or foreign financial institution sends the information to the IRS and they contact you before you have a chance to enter the program, the chances of you being subject the very stiff penalties skyrockets.
Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
Yes. At the current time, the IRS will not distinguish between the money you have in “Safe Banks” versus the money you have in banks identified as “facilitator banks” aka “Bad Banks.” Therefore, if you have any of your money in one of these bad banks, then before entering OVDP it is important that you determine whether you were actually willful (50% penalty applies) for non-willful (50% penalty does not apply).
Stated another way, just because you have money in a bad bank does not mean your entire offshore balance is subject to the 50% penalty; you must also be willful. Why? Because a person could be non-willful and still have their money in one of these bad banks — and that should not make them subject to a 50% penalty.
I Sold Foreign Property and Transferred Money into a Foreign Bank Account
The money that resulted from the sale will be included in the penalty calculation, if after you sold the home and placed the funds into a foreign bank account — you did not report the account.
Unreported Income from a Foreign Rental Property
If you have unreported foreign rental income from a home or property and you enter OVDP vs. the Streamlined Program, the value of the home is included in the penalty structure – subject to any mortgage that is due and owing on the home. The same rule does not apply to streamlined program applications (e.g., the value of the unreported income generating real estate is not included in the penalty computation).
What if I have an Unreported Foreign Gift (Form 3520)?
If you failed to report a gift from a foreign person, foreign business or trust distribution, it may be subject to a penalty unless you properly disclose it in accordance with amending your tax returns under OVDP. For more information about Foreign Gifts, please Click Here.
What if I Failed to Report a Foreign Trust (Form 3520-A)?
The U.S. Tax Code is stacked against Foreign Trusts. In other words, the failure to properly your foreign trust on a form 3520-A can lead to significant fines and penalties (as the U.S. Government may see it as your attempt to shelter money offshore in a Foreign Trust). To learn more about Foreign Trust Reporting, Please Click Here.
What if I Never Reported my Foreign Business Interest (Form 5471)
In order to avoid the problem of U.S. Taxpayers sheltering money offshore in foreign business (and not reporting the earnings), the IRS takes a hardline against individuals with unreported Foreign Business Interest. For individuals required to file form 5471, the failure to filing the form can lead to penalties upwards of $50,000 per return and the returns are due annually. To learn more about reporting your Interest in a Foreign Business, please Click Here.
I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
The IRS reserves the most complicated and complex tax computation for the infamous “PFIC aka Passive Foreign Investment Company.” Moreover, the IRS essentially deemed that all Foreign Mutual Funds fall under the PFIC umbrella. Therefore, that Foreign Mutual Fund you purchased offshore that is accruing and/or distributing Interest or Dividends may be subject to a monster tax analysis — especially if it qualifies as issuing an “Excess Distribution.” For a comprehensive analysis of PFIC 8621 reporting, please Click Here.
I Opened and Closed Accounts Several Bank Accounts
The most important thing to keep in mind is that the same money is not counted twice. Thus, it is very important to make sure the duplicity of account money issue is properly vetted on the application, so that the IRS is aware and understands the transfers.
I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
Yes. There are some people who may have submitted a “Quiet Disclosure” because they were unaware of the whole OVDP process, or though they could just amend the tax return late and file late FBAR statements.
What is GATCA/CRS?
CRS is the Common Reporting Standard, which is otherwise known as GATCA (Global Account Tax Compliance). The OECD has developed a new reporting standard in the shadow of FATCA to facilitate global tax compliance on an international scale. Therefore, chances are no matter how you set up your foreign accounts and in which country you are operating in — at some point or another one of the foreign financial institutions is going to report you.
What does “Under Examination” mean?
Leave it to the IRS to keep one of the most important aspects of qualifying for OVDP a nebulous uncertainty. Under examination generally means that you are either in an audit, or otherwise being questioned about your financial information by the IRS. To that end, depending on when you were contacted, how you were contacted, what information the auditor did or did not ask, the facts and circumstances surrounding your particular case, and many other concepts that can make your head spin – you may still be able to enter the program (depending on what stage of inquiry you received from the IRS).
Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
No. You only get one chance at this, so it is important that you really evaluate the facts and circumstances around your failure to report, in order to determine whether you were willful or non-willful. While technically, there is no way to know whether you are willful – you just have to know.
By speaking with an experienced OVDP Lawyer you may be able to get a better idea of whether you were willful or non-willful.