Wednesday, January 23, 2013

Steps in OVDI/P Processing and Opting Out

An anonymous commenter going under the name "Anonymous" posted the comment below.  It is a very good comment and solicits other comments, so I am posting it as a blog entry so that readers do not miss the excellent analysis and make comments as appropriate.

Anonymous 01/22/13 11:04 AM

I am listing below the steps leading to opting out of OVDI as I understand them from what I've read on this blog. I am not a professional, just a layman involved in OVDP. I am not sure everything is correct and would appreciate input. I've numbered the steps so intermediate steps can be added or the steps can be referred to by number.

1. Taxpayer decides to enter OVDP, possibly because of the risk of quiet disclosure or forward compliance.

2. Submit preclearance.

3. Submit intake letter.

4. Submit "package" of amended returns with payment of additional tax, 20% penalty on taxes, and interest on both, as well as penalty calculation worksheet.

4A. At this point, or once Federal returns are finalized, residents of many states will also need to file amended state income tax returns. The procedure, number of years, penalties, etc. vary by state and I'm just mentioning this so as not to leave it out.

5. After months, examiner assigned.

6. Examiner audit. Might be straighforward if returns prepared by professional.

7. On FBAR penalty, examiner's ONLY discretion is to eliminate accounts with signature authority and no financial interest, possibly also gross distortions such as funds from sale of home that were in an account for only a couple of days.

8. Examiner takes high balance and applies percentage (25%, 27.5%, 12.5% or in rare cases 5%)

9. Taxpayer told to agree to OVDP penalty and sign form 906, or opt out.

10. Would receipt of the form 906 be the most opportune moment to contact the TAs (Taxpayer Advocate)?

11. (Not clear on this) Examiner can, but is not required to, informally share penalty he/she would recommend in an optout scenario. I find it disturbing that the opinion of just one person, with unknown level of experience in OVDI, would carry weight with the opt-out committee.

12. (Not clear on this either.) Would the taxpayer share facts and circumstances from optout letter with examiner at this point to get an informed view of what penalties examiner would recommend?

13. If taxpayer opts out, IRS can re-audit everything, would calculate penalty based on facts and circumstances outlined in optout letter.

14. Not sure if on optout the SOL (statute of limitations) extensions would be void, or voidable, and the normal SOL of 6 yrs for FBAR and 3 years (6 if substantial understatement, unlimited if fraud) for income tax would apply.

15. On optout taxpayer can consider refund request to protect SOL.

16. On optout, taxpayer could also consider requesting refund of 20% accuracy penalty, arguing these are qualified amended returns.

17. Potential penalties on optout:

17A. If IRS believes it has a strong likelihood of being able to prove wilfulness, it can theoretically assess a penalty of 50% of the high balance for the 6 years within the SOL. It is likely that FBARs have been filed for the most recent year or two. Also likely that the IRS would go for only 50% of the highest balance year.

17B. If the IRS has strong doubts that it can prove wilfulness, the max penalty would be 10K/year for the past six years; likely less since it's likely that timely and accurate FBARs were filed for the past year or two.

Though the IRS has publicly stated that the nonwillful penalty is per account per year, Jack has expressed strong doubts that this is the case, and that the 10K limit is to be applied per form, per year (i.e., max. 10K/year.)

The IRM states that multiple penalties per year should be applied for only the most egregious cases. Would "most egregious" mean, in practice, cases where there is a strong likelihood of proving wilfulness, and after negotiation the taxpayer and IRS agree on multiple penalties per year?

In many cases the nonwillful penalty might be greater than the willful penalty using these formulas, so in nonwillful cases there may (and should!) be many cases in which the maximum cited would not be applied.

17C. Facts and circumstances indicating reasonable cause or reasons for mitigation outlined in the optout letter may reduce (or in some cases) entirely eliminate) the FBAR penalty calculated in 17B.

18. There will likely be some negotiating back and forth on the penalty based upon risk aversion by both sides, cost of litigation for both sides, hazards and litigation and so on. These factors would depend on facts and circumstances including account size, source and use of funds, etc.

19. If an agreement is reached, and taxpayer pays, end of story.

20. If no agreement acceptable to both parties is reached, or an agreement is reached but full payment is not made, the government can collect 100% of tax refunds due, garnish wages of Federal government workers, withhold payments if taxpayer is a government contractor, or withhold 15% of Social Security payments (or a smaller percentage so as not to leave taxpayer with less than $700 Social security payment per month.)

21. To collect anything more, the government must go to court and prove the penalty is appropriate. At this point taxpayer can raise any arguments/defenses about appropriateness of penalty. Lawsuit must be filed within two years of assessment of penalty. Question: would date be the date of IRS's first 906? Final 906?

22. For those residing abroad the above court action can take place in the US.

23. In light of costs of litigation, hazards of litigation, etc, a settlement may be reached (or at least, will be attempted) prior to or even after filing of lawsuit.

24. After the court decision, taxpayer either pays or government is able to seize any assets located in the US (such as bank accounts, real estate, etc.) Whether foreign governments would honor such a judgement for assets located in their countries would depend not just on the country involved, but possibly on whether the taxpayer is/was a citizen/resident of that country.

25. Even for assets located abroad, if taxpayer is physically present in the US, a court can order him to tell the foreign bank to send the assets to the US, and failure to do so could (or, more likely, would) subject taxpayer to arrest and imprisonment for contempt of court.

26. If taxpayer resides abroad, this might create further incentive for the government to settle.

Would appreciate comments especially on the parts I'm not clear about.


The original comment is to the Blog Entry "Opting Out" #3 (4/4/12),here.  The particular comment to that blog entry pasted above is here.


  1. "4A. At this point, or once Federal returns are finalized, residents of many states will also need to file amended state income tax returns. The procedure, number of years, penalties, etc. vary by state and I'm just mentioning this so as not to leave it out."

    Not so fast. Some states SOL follows Federal SOL. Only after singing 906 --that is you decide to let IRS assess your tax outside SOL, then you should file state return and it depends your own states law if or not you should also file beyond SOL -- most likely you have to do the same years as you have done with IRS.

    When you choose opt-out -- the uncertainty is the FBAR penalty --but the tax part is certain -- you are not been assessed outside SOL -- both federal and state.

  2. You can also add a 5A, 5B, 5C, 5D and 5E. 5A should read: It is likely that your first contact with the IRS will be from an IRS Agent whose sole responsibility is to determine if all the documents needed for OVDI are in the package. You will likely be asked to sign FBAR and Tax SoL consents by this agent. Do not get hopeful that your case is assigned. This agent is essentially part of a logistics team. Once the IRS has the relevant SoLs, your box will be put into a shipping area waiting for your case to be assigned. Assignment time is indefinite. It could take one year or more.

    5B should read: When your agent is assigned, expect the first thing they will do is to request you to sign more FBAR and tax SoLs as there has likely been a big time lapse between the logistical processing stage and the actual receipt of your box.

    5C: As your case proceeds, opt out or not, you may also be asked to sign more FBAR and tax SoLs as they run out.

    5D: If you opt out, if you have not already signed an FBAR SoL for the year that is about to run out, this is one of the first things that will be requested by your examiner "to protect the interests of the Service".

    5E: Just sign them and refrain from answering "To protect my interests, I refuse to sign them." You have to cooperate and the mere signing of them does not obligate you to pay the penalties. If you have reasonable cause, it should not matter that you have signed these FBAR extensions.

  3. What happens if TAS takes the case before signing the 906 form. Will it automatically extend the deadline for filing 906 form ? Will the IRS throw you out of the program ? Please let me know if somebody knows about it.

    1. I am also waiting for Jack to reply. I am very close to my case being accepted by TAS.

  4. Items 11 and 12. I do not think the examiner will have access to your letter before you opt out. You can appraise the examiner of the facts and circumstances of your case informally in conversation earlier. Except for really clear cut cases (people who should clearly opt out, and people who should not), I do not think you will necessarily have a good idea of your penalties prior to opting out. I gather that the examiner has to consult a technical advisor in many cases, and likely also a group manager. This should prevent undue penalties, but should also mean that you don't get a free pass even if the examiner is sympathetic.

    18 -- I do not believe much negotiation of penalty is possible at this stage. You can likely get some extreme cases (whole house included because of minor amount of rental income or a penalty based on one time transfers) waived. However, barring such extreme cases, unless the penalty is beyond the non willful penalty level, you may not find much relief below the OVD penalty.

    20 and 21 -- A penalty is a debt owed to the government. I do not believe the government specifically needs to go to court to prove the penalty is appropriate. You can always sue the government for a refund in the Court of Federal Claims or District Court, but I think when it comes to the smaller non willful penalty, the government will have an easy time proving its case (since the burden of proof is on you to demonstrate that you have reasonable cause).

    Realistically speaking, for those who reside in the US and have assets here, I think it would be impractical to leave a penalty hanging in the belief the government might not be able to collect. It would be like student debt owed to the government (which has ruined many lives), which NEVER goes away, even in bankruptcy.

    26. If the government thinks it has a very good penalty case, I do not know if would settle simply because of collection problems. The money may be less important to the government than sending a signal.

  5. I doubt the IRS would go beyond 10K/year/form for the non-willful penalty
    no matter how many accounts are involved. However, remember the per form caveat. If your spouse is a US person, then he or she may be
    penalized separately (this may depend on whether he or she has a
    separate FBAR filing requirement). If this sum is lower than your OVDP penalty, strongly consider opt out. But remember the mitigation guidelines may be useless for those with lots of small accounts. In that case, even with guidelines, you can quickly get to the maximum per year limit (which is rather unfair). The other thing to note is that if your case goes to Appeals, the IRS will likely assess the 10K/year/form level for all open years (unless you fall into the reasonable cause bucket). If this is greater than your OVD penalty, and the case goes to Appeals, I think the IRS will likely offer a settlement close to your OVD penalty in Appeals. So there would be little benefit of going to Appeals.

  6. See this link

    and the comments by 'blake' at that link

    I have a large fbar penalty due to my parents having an offshore trust
    and the IRs came after me as a bneficiary even thought I did not know
    it. I understand there is only a 2 year window to get a civil judgement
    after the fbar penalty is assessed. It has been over 2 years and no
    court filing has been done yet they are trying to collect (only $30 so
    far due to a tax credit they grabed. Anyway to get rid of the debt other
    than paying it. I am currently on public assistence and owe in the high
    six figures.


    Irs made a deal then renigged. Went into compliance program which then
    Irs required a full audit for 3 years and everyting to be exact. But
    when argued that was not part of the compliance they threw me out of the
    program and just went crazy. For the Fbar they decided all sub
    accounts, ie money market, carried a seperate Fbar Penalty and just
    added them up. They just did want they wanted to. 100 k for each FBAR

    This person's comments do not seem to relate to the OVD, but to a previous offshore compliance initiative from the early 2000s. And despite his self serving comments, I think this person did actually fall into the 'most egregious cases' category mentioned in the IRM. This person was fined on a per year/per account basis under the old FBAR law (100K max willful penalty). The Government apparently didn't bother to take him to court, because he had no money.

  7. I am the 'Anonymous' who posted the original comment. Thank you Jack for the honor of posting it as a blog entry and thank you all for the well researched and well thought out comments. I am still in the very early stages (submitted package but haven't heard back yet.) Once I have more to report I will choose a name other than 'Anonymous' and share my experience.

  8. Anonymous, it was my honor to post it. I posted it because I thought it was very thoughtful and informative. So, I thank you for contributing to this blog.

    Jack Townsend

  9. I am very interested in your " possibly also gross distortions such as funds from sale of home that were in an account for only a couple of days." - i have the same issue. i sent money to buy a real estate and money was in the account for only 4 days. do you have any guideline document which can help me on this matter? thank you for posting this.

  10. nice article thanks for sharing OVDI.

  11. Great blog. Very insightful. Does anyone know if there is a point of no-return in the OVDP process ? For example, are there any risks in getting a pre-clearance from the IRS and then deciding not to proceed by not submitting the "intake" letter (and opt for a quiet disclosure) ? Thank you !

  12. Yes, pre-clearance is the "point of no return." Once you're in the process the IRS will follow up for the subsequent required submissions. In my experience it took a lot of time to obtain bank statements and then to prepare returns. After not hering from me for months you betcha the IRS followed up.

  13. What exactly must the IRS do by the time the tax assessment SOL expires? Let's say the 3 or 6 year SOL expires by April 15. Must the IRS:
    a) Assess tax internally, but it may notify the taxpayer of the assessment after that date,
    b) Assess AND mail (postmark date) assessment notice to taxpayer
    c) Assess and mail the notice so that it is received by the expiration date of the assessment SOL

  14. Anonymous,

    The IRS must assess the tax within the applicable statute of limitations (usually 3 or 6 years). The assessment is simply a recording on the IRS records that the tax is owed. However, in the case of certain taxes (income tax is one), the IRS cannot assess until it has first issued a notice of deficiency. When the IRS issues the notice of deficiency within the assessment statute of limitations, the assessment statute of limitations is then suspended to give the taxpayer an opportunity to contest in the Tax Court. After that opportunity expires the statute starts running again (after an additional 60 day period).

    So, to summarize, the IRS will have to first issue a notice of deficiency. That will suspend the statute of limitations on assessment. You then have to be careful about how the statute if affected by that suspension to figure out the latest date the IRS can assess after issuing a notice of deficiency.

    I usually give my Tax Procedure students an exam question covering these calculations of the latest assessment date based on certain alternatives (such as filing in the Tax Court and appealing).

    Jack Townsend

  15. The risk in getting a preclearance and then not following through (submitting the intake letter as the next step) is that the taxpayer almost certainly will be audited or at least subject to follow-through as to why the process was not completed. And, the taxpayer does not get the benefit of amnesty from criminal prosecution normally assured under the OVDP. So, before a taxpayer considers not taking the next step, he or should should carefully assess his or her criminal prosecution potential. Further, since the taxpayer is at high risk -- perhaps even certainty -- of audit, the taxpayer might be better off just to complete the process and opt out.

    Jack Townsend

  16. Good question @Anonymous unfortunately Jacks response does not answer it.
    I think we all know that the IRS cannot assess until it has first issued a notice of deficiency (NOD) and we also know that the NOD has to be issued within the assessment statute of limitations period (SOL) but what we do not know is the answer to some details which you ask under a), b), and c) . Maybe Jack can try one more time to provide some details with regards to your questions or pass it along as a pop quiz for his Tax Procedure students.

  17. GlobalCapitalism noted that I did not answer the questions you asked. Thanks to him/her for reminding me on this.

    Subject to the requirements of an NOD and assessment within the period:

    a) the IRS must assess internally.

    b) in order to use the administrative collection measures (lien and levy), the IRS must contemporaneously with assessment mail to the taxpayer a notice of assessment and demand for payment. That notice must be sent to the taxpayer's last known address.

    c) the notice and demand for payment is timely if mailed timely, but keep in mind that the notice and demand for payment merely enables administrative collection measures for the assessment. The key date is the assessment date, which must be within the applicable statute of limitations (subject to any suspensions). Indeed, so long as the notice and demand is sent contemporaneously to the tapxayer's last known address, it need not even be received by the taxpayer, whether within the statute of limitations or not.

    In sum, it is the assessment date that is critical -- the internal recording on the IRS books. Here is a quote from a Supreme Court case on the nature of the assessment (Hibbs, Director, Arizona Dept. Of Revenue v. Winn, 542 U.S. 88 (2004):

    As used in the Internal Revenue Code (IRC), the term “assessment” involves a “recording” of the amount the taxpayer owes the Government. 26 U.S.C. §6203. The “assessment” is “essentially a bookkeeping notation.” Laing v. United States, 423 U.S. 161, 170, n. 13 (1976). Section 6201(a) of the IRC authorizes the Secretary of the Treasury “to make . . . assessments of all taxes . . . imposed by this title.” An assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” §6203.n. 2 See also M. Saltzman, IRS Practice and Procedure ¶10.02, pp. 10-4 to 10-7 (2d ed. 1991) (when Internal Revenue Service signs “summary list” of assessment to record amount of tax liability, “the official act of assessment has occurred for purposes of the Code”).

    n. 2 Section 301.6203-1 of the Treasury Regulations states that an assessment is accomplished by the “assessment officer signing the summary record of assessment,” which, “through supporting records,” provides “identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment.” 26 CFR §301.6203-1 (2003).

    Hope that addresses the questions you asked.

    Jack Townsend


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