Offshore Voluntary Disclosure – Opt Out

At any time prior to signing a closing agreement, a taxpayer could have chosen to opt-out of the 2012 Offshore Voluntary Disclosure Program. The election must be made in writing and was irrevocable. Once an opt-out election was made, the taxpayer’s case was evaluated under the general IRS audit process and subject the taxpayer to the statutory FBAR penalty scheme provided under the under the Bank Secrecy Act and the tax and penalty provisions of the Internal Revenue Code and Regulations.

If a taxpayer opted-out of the 2012 OVDP, the IRS may have asserted all penalties in the Internal Revenue Code and Bank Secrecy Act, including, but not limited to, the accuracy-related penalty, failure to file and failure to pay penalties, willful and non-willful FBAR penalties, penalties for failure to file various information returns, and civil fraud penalties. However, even in an opt-out case, the taxpayer was entitled to the criminal amnesty aspects of the OVDP.

When to Opt Out

In general, the taxpayer may have elected to opt-out when the result reached under the 2012 OVDP penalty framework appears too severe under the taxpayer’s specific set of facts. Additionally, unlike the rigid OVDP penalty scheme, in a traditional audit procedure after an OVDP opt-out, the revenue agent on the case would have been able to use discretion and a certain amount of flexibility in determining the appropriate penalty based on the taxpayer’s specific facts and circumstances. However, the potential range of penalties given the taxpayer’s specific facts and circumstances, and the substantial legal and accounting costs related to a potential comprehensive IRS audit, should have been carefully weighed against the potential benefits of an opt-out before an informed decision was made. Once the taxpayer elected to opt-out of the OVDP, the IRS provided specific procedures in the Opt-Out and Removal Guide posted on the IRS website. The IRS provided its own view concerning the circumstances warranting a taxpayer Opt-Out and the circumstance when it believes an opt-out to be inadvisable in the 2012 FAQs 51.1 and 51.2.

The IRS believes that it had a responsibility to ensure that any taxpayer electing to opt-out of the OVDP was making an informed decision. Since the Opt-Out could result in a taxpayer owing either more or less than the amount that would be payable under the OVDP structure, the IRS took a number of steps before making a taxpayer’s opt-out election irrevocable. The IRS would first send Letter 4728 setting forth the status of the OVDP certification, and if known, detailing the tax, penalties and interest that would have been due under the OVDP structure. If the taxpayer failed to respond within 30 days to the 4728 Letter, the IRS would then notify the taxpayer in Letter 4564 that the election was irrevocable. Once the election was final and irrevocable, the IRS examiner on the case prepared a summary of the case and made a determination whether the examiner agreed with the Taxpayer’s statement of facts and a recommendation about the appropriate handling of the case outside of the OVDP. The examiner would make a recommendation concerning the appropriate income tax due and related income tax penalties, whether the FBAR penalty should have been calculated as willful or non-willful, and a recommended audit scope. Once complete, the examiner’s recommendation was forwarded to the centralized review committee for decision. This committee’s decision was final. If the case was then assigned for a full-scope audit, the examiner would interview the taxpayer to finalize the exam process and procedure. Unless otherwise instructed, the examiner was required to examine all open years included in the taxpayer’s OVDP submission including both domestic and offshore activities. The case then proceeded under standard IRS audit procedures.

The potential risk and reward to the taxpayer was substantial. Taxpayers should have carefully weighed the potential legal fee, accounting fees, and audit risk against the potential tax and penalty savings before making an informed decision about an OVDP Opt-Out election.

Contact Us

To learn more about the Voluntary Disclosure Program and any other options available to you, contact Rosefelt Tax Law at 866-995–0061 or reach out by completing our ten-second contact us form to know your real options. We serve clients from around the world at our offices in Bethesda, Maryland (Greater Washington D.C. Metro area), or from our satellite offices by appointment in Fairfax, Virginia and Saint Petersburg Florida.