Opting out of the Offshore Voluntary Disclosure Program - Part One

Opting out of the offshore voluntary disclosure program can be a difficult choice. An opt out is an irrevocable election made by a taxpayer to leave the safe harbor of the OVDP, and have his or her case handled under the standard audit process. This is different from removal, which is a determination made by IRS personnel to remove a taxpayer from the civil settlement structure of the OVDP because the taxpayer or taxpayer’s representative has not cooperated. The IRS has recognized that there are cases were opting out may be the better approach for the taxpayer. In these cases, the results under the OVDP are too severe given the facts of the actual case. If the violation was not willful and there is a low exposure for criminal penalties to the taxpayer, the standard audit procedure may result in a lower monetary penalty making opting out of the offshore voluntary disclosure program logical.

The National Taxpayer Advocate prepared a report with data up to June 7, 2013.[1] Under the 2011 OVDI, there were 12,532 certification applications. Of those granted certification, 3,666 cases were closed. It took on average 180.5 days to close a case. Of those cases 8,849 are still pending. Of the 12,532 certification applications 323 taxpayers elected to opt out of the OVDI. Under the 2009 OVDP, 10,792 cases were filed with 290 taxpayers electing to opt out. As of the date of the report 6,435 cases had been filed under 2012 OVDP. Only 6 of those cases had been resolved as of the date of the report, but there were no reported opt outs. It is likely that the primary reason for a lack of opt outs is that the cases have not yet reached the stage where the IRS has made a determination and recommendation for penalty structure. This is when the majority of the opt outs occur.

Because opting out of the offshore voluntary disclosure program is irrevocable, the IRS has adopted a very precise set of procedures designed to make sure the taxpayer is fully aware of the consequences of opting out of the offshore voluntary disclosure program.[2] The Service has stated it has a responsibility to any taxpayer considering opting out and undergoing an examination to ensure that the taxpayer is making an informed decision. The IRS wants to make sure that a taxpayer knows that an opt out could result in a taxpayer owing more than the taxpayer would under the civil settlement structure, but it also could result in a taxpayer owing less. Also that the scope of any resulting examination may change from being limited to offshore accounts and could open the taxpayer up to exposure on other matters.

[1] National Taxpayer Advocate report: https://www.taxpayeradvocate.irs.gov/userfiles/file/FullReport/IRS-Offshore-Voluntary-Disclosure-Programs-Continue-to-Burden-Benign-Actors-and-Damage-IRS-Credibility.pdf

[2]IRS memorandum regarding guidance for opting out https://www.irs.gov/pub/newsroom/2011_ovdi_opt_out_and_removal_guide_and_memo_june_1_2011.pdf