Opting Out of OVDP

Posted on: December 28, 2017 | By: Stephen Dunn | Delinquent FBAR Submission Procedures, Opting Out of OVDP, OVDP, Paths to Compliance, Streamlined Procedures

Recently, a man called who had first called me in 2015.  When he first called, the man wanted to become compliant with U.S. laws concerning foreign financial accounts.  He hadn’t underreported tax with respect to foreign financial accounts.  But he had only recently learned of the requirement of filing FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, and of filing Form 8938, Statement of Specified Foreign Financial Assets.

A local attorney was urging the man to enter the Offshore Voluntary Disclosure Program (“OVDP”).  The OVDP would require the man to file amended income tax return for the preceding eight years; files delinquent FBARs for the preceding eight years; waive the statute of limitations on assessment of income tax;  waive the statute of limitations on assessment of FBAR penalties; pay tax due on the amended income tax returns, and interest on the tax; pay an “accuracy-related” (negligence) penalty equal to 20 percent of the tax due on the amended income tax returns; and pay an FBAR penalty equal to 27.5 percent of the high aggregate balance of his foreign financial accounts over the eight-year reporting period.  An OVDP filing maximizes amounts which the applicant pays in tax, interest, penalties, legal fees, and accounting fees.

On June 18, 2014, the IRS announced its Streamlined Offshore Compliance Procedures.  Under the Streamlined Procedures, the taxpayer files delinquent FBARs as needed for the preceding six years; files amended U.S. income tax returns as needed for the preceding three years;   pays any tax due on the amended income tax returns, and interest on the tax; and pays an FBAR penalty equal to five percent of the high year-end balance of his foreign financial accounts over the preceding six years.  Significantly, a taxpayer who is not a resident of the U.S. pays no FBAR penalty under the Streamlined Procedures.  An individual is a “nonresident of the U.S.” for this purpose if he or she was physically outside the U.S. for at least 330 full days in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed.

The presence of willfulness is what elevates a case from the Streamlined Procedures to OVDP.  Willfulness for this purpose is intent to evade U.S. income tax.  The classic willfulness profile is a U.S. taxpayer who transfers $1 million or more to a financial account in a country with banking secrecy laws, and invests the money there and fails to report income realized from the foreign investments on his U.S. income tax return.  This excludes the great many immigrants to the U.S. who leave financial accounts behind in their country of origin.

In our experience, few taxpayers meet the willfulness standard.  People were giving up their U.S. citizenship due to our country’s foreign accounts compliance laws. The IRS intended the Streamlined Procedures as a less punitive alternative to the OVDP.  The Streamlined Procedures should be liberally construed to achieve their ameliorative purpose.

Many taxpayers have come to us after having paid a retainer of $15,000 or more to a lawyer for an inappropriate OVDP filing.  Many of them had been frightened into an OVDP filing by the spectre of criminal or draconian civil penalties.  Cases in which such penalties have been proposed are extremely rare, and involve egregious facts.  The letter by which the IRS accepts a taxpayer’s application to the OVDP vaguely states:

A voluntary disclosure will not automatically guarantee immunity from prosecution; however a voluntary disclosure may result in a prosecution not being recommended.

Please be aware that to make a voluntary disclosure complete, your client(s) must fully cooperate with the IRS in determining the correct and appropriate tax liability and pay or make bona fide arrangements to pay any tax, interest, and penalties determined by the IRS to be applicable.  This required cooperation includes production of all requested documents, and submitting to an interview, if requested by an IRS agent.

A taxpayer submitting to an interview by an IRS agent without immunity from prosecution could have disasterous consequences for the taxpayer.

When the man called in 2015, I explained to him that Congress had enacted the FBAR filing requirement, and the 50 percent “draconian” penalty for failure to file FBARs, to curb the use of foreign financial accounts to evade U.S. income tax.  I said that the FBAR penalty regime does not apply to a person who, like him, had not underreported U.S. income tax with respect to foreign financial accounts.  I said that, because the man had not underreported U.S. income tax with respect to foreign financial accounts, neither the OVDP nor the Streamlined Procedures applied to him.  All he had to do to become compliant with U.S. laws concerning foreign financial accounts was file his delinquent FBARs, and file amended U.S. income tax returns attaching his delinquent Forms 8938.  I said that the IRS had made several, recent, pronouncements to this effect.

I told the man in 2015 that the IRS encourages voluntary compliance, and never proposes penalties against taxpayers who voluntarily comply with the law, without being contacted by the IRS concerning their noncompliance.  I said that for this reason, the man should become compliant as soon as possible.

When the man called me other day, he said that he had entered the OVDP two years ago.  He said that he had been through a revenue agent’s review of his income tax returns, and that he was on the verge of signing a Form 906, Closing Agreement, and returning it to the IRS with payment of OVDP penalties.  The revenue agent mentioned that agents had been instructed not to exact penalties from taxpayers who had not underreported their tax liability.   The man wondered whether he should withdraw from the OVDP, which he can do if he has not signed Form 906 and returned it to the IRS.

The IRS dissuades OVDP applicants from withdrawing from the program by maintaining that it reserves the right to examine their income tax returns, raising the spectre of assessment of additional tax, accuracy-related penalties and draconian FBAR penalties against such taxpayers.

We have withdrawn clients from the OVDP, saving them hundreds of thousands of dollars in penalties.  Better had such taxpayers not entered the OVDP in the first place.

The man who called the other day has already been through an IRS examination of his income tax returns, with a finding of no additional tax due.  The examining revenue agent had suggested to him opting out of OVDP.  To rule out the statutory predicate for the draconian FBAR penalty, the agent requested a letter explaining that the man’s noncompliance was not willful.   The man should provide the agent the requested letter, and opt out of OVDP, avoiding the OVDP penalty.  He has no downside risk in doing so.

Other posts of interest:

Why You Need an Attorney in Charge of Your Foreign Accounts Compliance Case

U.S. Persons’ Reporting Obligations Regarding Foreign Financial Assets

OVDP Often a Bad Choice for Foreign Accounts Compliance

You May Only Need to File Delinquent FBARs

Reporting Horrors of Foreign Mutual Funds (“PFICs”)

Compliance Required of U.S. Persons Concerning Foreign Financial Accounts

Beneficial Ownership, Income Tax, and FBARs

Foreign Accounts? Here’s What You Need to Know

OVDP Often a Bad Choice for Foreign Accounts Compliance

Our Approach to Foreign Accounts Cases

Conflicts of Interest in Handling Foreign Financial Accounts Cases

Disclosure of Indian Financial Accounts to the U.S. Government

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