Tuesday, November 5, 2013

Should You Opt Out of OVDI/P? (11/5/13)

I point readers to this new article:  Robert W. Wood, Should You Opt Out Of IRS Offshore Amnesty? (Bloomberg BNA 11/5/13). here.

The author is a very good lawyer.  See his bio here.  He is well respected in the tax community and I, sometimes a member of the sames community, respect him.

Still, I think an article of this nature must be taken with a grain of salt.  Opting out is a larger issue than, I think, can be presented in a article, certainly a short article, outside the context of specific facts (that comment should make readers wary of my own blogs).  That's basically it.

But I will point out one mistake he makes in the article,  He says:
Even criminal prosecution is conceivable after opting out, although that has evidently not happened to anyone. 
That is not true, as presented.  Opting out of an otherwise good OVDI/P presentation and thereafter cooperating in the opt out audit achieves the same "amnesty" from criminal prosecution as if the taxpayer had not opted out.  Let me state that strongly:  Assuming an otherwise good submission of documents and full cooperation, a taxpayer does not increase his or her risk of prosecution by opting out.  I disagree with putting unnecessary fear into this equation.

The author is correct that "once outside the program, the IRS may assess the civil fraud penalty or information return penalties."  And, the willful FBAR penalty can apply.  And, as he later notes, civil fraud can open up an otherwise closed statute of limitation.  Those considering opt out must take those factors into account.

But, I don't think and certainly have not experienced his comment that "Some say the IRS may apply rough justice by calculating FBAR penalties that approximate the 27.5% miscellaneous offshore penalty within the OVDP."  He attributes that to some unnamed others and not to himself.  I don't think the IRS is that petty.  Certainly have not experienced it.

He is, of course, correct that "[t]he OVDP is predictable."  I tell my clients that the only certainty in this offshore account universe is the OVDP penalty structure (including, under the current iteration, the 27 1/2 % penalty for noncompliant foreign assets).  But, for experienced practitioners, there is less uncertainty in the opt out than might otherwise be perceived.  Wise counsel is what is needed.  It is not for the faint hearted or those with inexperienced counsel.


  1. A full/truthful disclosure (OVDI or opt-out otherwise) will certainly have exact outcome as far as criminal prosecution is concerned. The only difference is the penalty on offshore back account balance --- FBAR penalty based on IRM which is rather uncertain or fixed rate based on OVDI (12.5% or 27.5%).

  2. However, if forward/quiet disclosure should be considered as full/truthful disclosure by IRS ? I don't think it should.

  3. Nice post. I read your post. It’s very simple and
    informatics. Thank you for sharing..............


  4. I don't think any discussion of opting out is complete without pointing out that, ordinarily, the same issues should be considered before deciding whether or not to participate in OVDI/P in the first place. If an experienced practitioner determines that the risk of criminal prosecution is not material, a person who would otherwise opt out would typically be better off not participating in the first instance. There may be a reason in a given scenario to enter OVDI/P and defer consideration of a possible opt-out until later (for example, in some funny fact patterns there may be uncertainty about how the one-size-fits-all penalty may be calculated), but this should be the exception, not the rule.

  5. "Some say the IRS may apply rough justice by calculating FBAR penalties
    that approximate the 27.5% miscellaneous offshore penalty within the
    OVDP." .... this sounds about right !
    I am not even making another comment with regards to the tax lawyer fear mongering vicious circle but I think Jack you give the "system" and the "service" too much credit . They extort because they legally can - it is a state of mind plain and simple . The taxpayers are "customers" that are rounded up and finally slaughtered. As many practitioners will tell you many FBAR penalties are disproportionate compared to the conduct and as you know just as it is difficult to show intend, it is also difficult to show a lack of intent !

  6. I disagree. The Code imposes no legal requirement to clean up past errors. There may be prudential reasons to do so -- mitigating civil and criminal penalties, but there is no legal requirement nor should any penalty be imposed solely because you do not correct past errors (the penalty would apply to the past errors). So, although a go-forward is not full and complete disclosure in a voluntary disclosure sense, It it full and complete as to all go-forward matters, including any audit that may occur as to past years and events.

    Jack Townsend

  7. before I forget it :
    "And, as he later notes, civil fraud can open up an otherwise closed statute of limitation".....
    it is my understanding that this is valid for Code Sec. 6663(a) but not for the FBAR SOL which has still a 6 year statue.

  8. That is true. The FBAR civil SOL is 6 years period. The only exception is if the taxpayer waives the 6 year SOL. As I have previously noted, if the taxpayer waives the DOJ position is that the FBAR civil SOL is open solely by virtue of the waiver / consent regardless of whether the civil SOL was still open when the waiver / consent is signed.

  9. I like for readers to add that the civil FBAR penalty is a specific intent penalty for purposes of the penalty under Section 5321(a)(5). Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest differences of opinion, negligence, or carelessness.

    In general, under Title 31, the U.S. may review and may take
    action on any FBAR under a 6-year statute of limitations. However, the IRS apparently has informally developed a policy that would reopen what would otherwise be a closed statute by execution of the FBAR consent form, ‘‘Consent to Extend the Time to Assess

    Civil Penalties Provided by 31 U.S.C. Section 5321 for FBAR Violations,’’ on the theory that such execution is a waiver of a defense. In Title 26, it is black-letter law that the execution of Form 872, ‘‘Consent to Extend the Time to Assess Tax,’’ with respect to an otherwise closed year will not under any circumstances open that closed year. For the IRS to reach an interpretation to the contrary under Title 31 without adequate statutory,
    regulatory, or even case law support seems beyond the scope of IRS authority Further, IRS representatives, including field agentsand IRS counsel, have informally commented over the years that similar to the treatment of closed years under Title 26, under Title 31 the execution of the FBAR consent form would not reopen an otherwise closed year, even after the execution of Form 872. If the IRS presses this position, it is unlikely it would prevail in court.

  10. Jack I would like to raise another interesting controversial point or black spot in the VD (not OVDI/P) saga with hypothetical hazard of litigation potential. The question is who will pull the trigger first.
    4/1/2010 Letter from Dep. of the Treasury .... the IRS is trying to create a ``uniform penalty structure that treats taxpayers consistently and predictably``.
    I emphasize here the word "consistently" and this is where I see problems, lawsuits in the future.
    I know personally of 2 cases where the facts and circumstances are nearly identical - the 2 taxpayers are even living in the same country and working for the same company where the outcome of the FBAR penalty calculations couldn`t be more different from each other.
    Now comes the interesting part - as of today - they do know each other but not the specific numbers and therefore the substantial differences. Now from a practical point of view it needs a "Whistleblower" - who would be me - to let them know the details. Obviously the question is would the one taxpayer that got away with the much better outcome suffer and the other taxpayer receive during the now necessary appeals procedure a better deal ?
    Is there presedence for such a case ?

    It seems to me that the guidelines with regards to the examiners discretion didn`t perform according to plan.

  11. Mr Miller states -"If an experienced practitioner......better not participating in the first place". But even with little or no risk of criminal prosecution, the taxpayer must weigh his tolerance for financial loss if the practitioner is unsuccessful in mitigating the maximum opt out penalties. The age of the taxpayer, state of retirement accounts, real estate owned, mortgages and other debt etc...in general how much of his wealth can he afford to lose. If a small account is at stake then the difference in fees one would pay to an experienced lawyer for an opt out versus and OVDP submission could be greater than the 271/2% penalty under VD. I believe there are even some tax attorneys who steer clients away from OVDP since it is more interesting and lucrative to take the other route.
    It is also unfortunate that participation in the OVDP implies the stigma of guilt (let's all line up for the guillotine and see if we lose a hand or a leg or a head), rather than making a case for oneself and seeking a fairer restitution. But as Jack pointed out, the alternative is not for the faint-hearted unless you are very patient, confident of a successful outcome, and willing to risk losing all your savings.

  12. Jack, thank you for posting and for clarifying the criminal implications (or absence of) on an opt-out. When I read Robert Wood's article, I had the same reaction that you did.

    We are currently engaged in an opt-out analysis for a number of clients. And, as you alluded, it is a very complex analysis that includes many factors, all of which would be considered by the IRS agent assigned to the opt-out. Relevant questions would include:
    Any facts to support a willfulness argument by the IRS?
    Any facts to support a civil fraud penalty by the IRS?
    Would the mitigating factors of the Internal Revenue Manual apply? If so, would they help in reducing penalties?
    What are the relevant numbers involved (penalty within the program, compared to FBAR penalties (willful and non-willful) on an opt-out, plus any additional penalties on an opt out (e.g., civil fraud penalty)?
    Multiple accounts over multiple years, and the potential for the IRS to assess FBAR penalties to each account, each year?
    Does the penalty within the program include the value of assets (e.g., real estate) that would not be included in a penalty calculation on an opt-out?
    Are there any skeletons in the taxpayer's closet - - foreign or domestic - - that might be revealed during the full audit/examination that will be part of an opt-out?
    What is the client's tolerance for more time dealing with the IRS, including the opt-out committee, including a full audit/examination, and the legal fees involved?

  13. One additional piece of information that we learned recently. Previously, the civil Revenue Agent assigned to the OVDI/P matter might have been the same agent assigned to the opt-out. In addition, previously, the civil Revenue Agent was to set forth suggestions to an opt-out committee regarding penalties on an opt-out. Neither is the case any longer.

    The fact that the Revenue Agent who had been assigned to the matter was able to consider and suggest penalties on the opt-out, may have been a benefit to the taxpayer. The agent and the taxpayer (or taxpayer's representative) may have established a rapport, and the agent would have been able to make an assessment as to willful/non-willful acts, and presumably would have been familiar with any facts in taxpayer's favor, all of which would have been relevant in that agent's assessment and recommendations on an opt-out. The fact that the taxpayer (or taxpayer's representative) may have had a conversation with the agent to gauge the agent's tenor as to the facts and the agent's position on penalties in an opt-out, would have been invaluable (although non-binding) information for the taxpayer to weigh in the decision whether or not to opt-out.

    However, the procedure has now changed. Now, all opt-outs are sent to an IRS office in Milwaukee, which has been designated as the opt-out processing location. The civil Revenue Agent who had been handling the OVDI/P file will not be the agent handling the opt-out, and will no longer make recommendations to an opt-out committee. The agents in Milwaukee will take the file anew. Civil agents are also now reluctant to give the taxpayer (or his/her representative) the agent's assessment as to facts and penalties on an opt-out. Which makes the opt-out process, as Jack put it, fraught with more uncertainty.

  14. Jack, What I was trying to say is that taxpayers with bad facts of past returns should really consider to correct past "mistakes" with full disclosure of past in order to avoid harsh penalty and possible criminal prosecution.

  15. It will be interesting to see what the courts have to say if the position is ever tested. And this highlights one of the reasons to look before you leap, i.e., to carefully consider opt-out type issues before entering OVDI/P. If you give the IRS consents to extend the FBAR SOL, and ultimately opt out, you may find you've given the IRS quite a nice present by allowing them to assess FBAR penalties post-opt-out that couldn't otherwise have been lawfully assessed.

  16. Taxes are very confusing to me. I am trying to run a company as well as be a father of two young children. Should I hire a book keeping service out of Hamilton?

  17. Excellent point, Michael. Thanks for making it.

  18. I agree if that the taxpayer has bad facts -- bad is a relative term, so what I mean he has some considerable risk of criminal prosecution -- he should join the program and formally correct the past mistakes. There is probably a border line on the spectrum that is quite hazy as to where, even without certain bad facts, a cautious taxpayer who is not a risk taker might want to join the program and pay the price for certainty. Otherwise, if it is clear that the facts are not bad (that is to say, there are good facts) , then he has the key three choices -- join and opt out, quiet disclosure or go-forward. All of those should be considered, but I would think that the latter is a viable option for the well-counseled.

    Jack Townsend

  19. Asher, my latest opt out (perhaps 5 weeks ago) is being handled by the same agent. So, I can't verify this new procedure.

    For anecdotal reasons, I would be concerned about the Milwaukee office processing. However, I do have to be careful about conclusions from a single anecdote.

    Jack Townsend

  20. Asher,

    Thanks. As always your comments are good and, I think, helpful to a number of readers.

    Jack Townsend

  21. The IRS is a large organization. Perfectly consistent results are impossible. And, in opt out (or other audit situations), cases are developed through different agents' perspectives, so even in situations that might appear to some similar, to others they may not appear so similar. I am not making excuses for any truly inconsistent treatment that may occur and I do not doubt that occasionally it does occur. I am just saying that, with processes to minimize the inconsistent treatments, there will still be some.

    For example, in a more open process, our courts are supposed to gravitate to consistent treatment. In large part they do. But they sometimes -- perhaps too frequently -- do not. That potential is hopeful realized in relatively few cases, but it is there and known to all. Indeed, you may know that, in our tax system, we have different courts in which tax cases can be litigated. Taxpayers can get different treatments in those courts until and unless the Supreme Court commands consistent treatment. That is true as a general statement, but there is a lot of nuance behind that.

    Of course, you are dealing with a single agency in this instance and, should inconsistent treatment be called to the managers' attention, they should do what they can. You raise the question as to which direction they may move to correct any perceived inconsistency. That is a good question. I don't have an easy answer for you on that one.

    My experience is that when I have called more favorable inconsistent treatment to the IRS's attention in order to obtain that treatment for my client, the IRS has refused if they thought they were treating my client favorably and has requested the names of the agents giving more favorable treatment and the names of the representatives who obtained the more favorable treatment for their taxpayers. In that instance, none of the representatives authorized me to disclose that information. But the key point is that the IRS will not deviate from what it thinks is the right treatment just because somebody, somewhere with perhaps the same overall relevant facts may have gotten a better result.

    Jack Townsend

  22. The agent certifying my OVDI is in St. Louis (I am on the East Coast) and he said if I were to opt out my case would be sent to Milwaukee. Such may not be the case where the certifying office is elsewhere.

  23. Many lawyers, perhaps most, discourage clients from opting out because they have little/no optout experience and don't want to get blamed if something goes wrong so they scare those considering optout with potential willful penalties of 50% per year, and criminal penalties. This makes the 27.5% sound good by comparison.

    That was certainly the case with my lawyer who dangled the possibility of optout when I first met him (since I thought I did not deserve 27.5%) and now is finally revealing his fear and inexperience. The reason I paid for him to handle this was so that all the i's would be dotted and the t's crossed when I decided to opt out. Had I known he would not encourage optout I could have saved the $25K and done it myself.

    Regarding the online article by Mr. Wood, he also doesn't point out that the SOL on taxes would make some earlier years drop off on optout. Apparently this might be the case on FBAR penalties as well, in spite of the SOL extension documents. For example, in the Zwerner case, he was assessed 4 years (matter now in litigation) although it seems that 6 years were open at the time he requested to join OVDI (I am not sure about this.)

    The advice to discuss an optout decision with experienced counsel has just one catch -- there is very little experience with optouts among lawyers, and even then, only with the most obvious optout candidates, not those in the gray area.

  24. great facts "GlobalCapitalism" - thanks a lot for all your valuable input. You are my favorite poster here.

  25. Anonymous - you paid your tax lawyer $25K to handle IDRs within OVDP and coordinate 1040X with the examiner ?

  26. Anonymous, thanks for sharing your experiences with readers. I just wanted to say that, upon opt out some FBAR years could drop out if the taxpayer has not signed a consent for the earlier years. To have progressed to the opt out point, the taxpayer will have submitted consents to extend the statutes of limitations for both FBARs and income tax. The income tax consent is only effective for years othewise open on the date they are counter-signed by the IRS. However, the IRS takes the position that there is no such limitations for FBAR consents and that FBAR consents, properly signed, are effective for years otherwise closed at the time they are signed.

    I don't know what happened in Werner -- i.e., whether he had ever given FBAR consents. However, I think the IRS would have been pressing the issue to go for more years even if it could have. You know the saying that the pigs get slaughtered. The IRS may get slaughtered for its 4-year reach.

    Jack Townsend

  27. Jack , small correction it was Zwerner not Werner .

  28. Jack, thanks for your response.

    About the FBAR SOL extension consent, in order for there to be a valid contract it seems that there would have to be consideration. What exactly is the consideration, since the consent states that one is not obligated to sign it? Would the consent be more like a gift (like a pledge to a charity) which could be revoked by the signer at any time?

    Also, is it really true that one is not obligated to sign it? Could someone realistically join OVDI and refuse? (I'm guessing the answer is no.) But if that's the case, would this be a contract or is there duress involved?


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