At any time prior to signing a closing agreement, a taxpayer may choose to opt-out of the 2012 Offshore Voluntary Disclosure Program. The election must be made in writing and is irrevocable. Once an opt-out election is made, the taxpayer’s case will be evaluated under the general IRS audit process and will 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 opts-out of the 2012 OVDP, the IRS may assert 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 may remain entitled to the criminal amnesty aspects of the OVDP.
When to Opt Out
In general, the taxpayer may elect to opt-put 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 OVD opt-out, the revenue agent on the case will be 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 audit IRS cost, must be carefully weighed against the potential benefits of an opt-out before an informed decision is made. Once the taxpayer does elect to opt-out of the OVDP, the IRS has provided specific procedures in the Opt-Out and Removal Guide posted on the IRS website. The IRS has 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 FAQs 51.1 and 51.2.
The IRS believes that it has a responsibility to ensure that any taxpayer electing to opt-out of the OVDP is 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 takes a number of steps before making a taxpayer’s opt-out election irrevocable. The IRS first sends Letter 4728 setting forth the status of the OCDP certification, and if known, detailing the tax, penalties and interest that would be due under the OVDP structure. If the taxpayer fails to respond within 30 days to the 4728 Letter, the IRS will then notify the taxpayer in Letter 4564 that the election is now irrevocable. Once the election is final and irrevocable, the IRS examiner on the case will prepare a summary of the case and make a determination whether the examiner agrees with the Taxpayer’s statement of facts and a recommendation about the appropriate handling of the case outside of the OVDP. The examiner will make a recommendation concerning the appropriate income tax due and related income tax penalties, whether the FBAR penalty should calculated as willful or non-willful, and a recommended audit scope. Once complete, the examiner’s recommendation is forwarded to the centralized review committee for decision. This committee’s decision is final. If the case is then assigned for a full-scope audit, the examiner will interview the taxpayer to finalize the exam process and procedure. Unless otherwise instructed, the examiner is required to examine all open years included in the taxpayer’s OVDP submission including both domestic and offshore activities. The case then proceeds under standard IRS audit procedures.
The potential risk and reward to the taxpayer can be substantial. Taxpayers should carefully weigh 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.
If you have an undisclosed offshore account or undisclosed offshore income, Daniel Rosefelt, Attorney & CPA has a unique combination of experience and skill learned over a decade of successfully helping clients resolve their foreign income and asset problems. Contact us at (301) 656-4424 or reach out by completing our ten-second consultation form.