Opting-Out of OVDP
The Bank Secrecy Act requires U.S. citizens and residents to report foreign accounts on Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (‘FBAR’) so that the government can better detect individuals engaged in tax evasion, terrorism, and money laundering.
In 2009, the IRS initiated a series of offshore voluntary disclosure programs (‘OVDP”) to settle with taxpayers who had failed to report offshore income and file any related information return such as the FBAR.
Under the terms of the OVDP taxpayers must provide the IRS with copies of previously filed original federal income tax returns, information returns and FBARs as well as amended federal income tax returns, information returns and FBARs for tax years covered by the voluntary disclosure. Taxpayers in OVDP must provide information on offshore financial accounts, institutions and facilitators, sign agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties and pay 20% accuracy-related penalties on the full amount of offshore-related underpayments of tax for all years, and pay a 27.5% offshore penalty. Following this process these OVDP taxpayers are provided with the opportunity to execute a Form 906, Closing Agreement on Final Determination Covering Specific Matters (“Closing Agreement”), and generally eliminate the risk of criminal prosecution. Taxpayers do not receive protection from criminal prosecution outside of OVDP.
At any time prior to signing a Closing Agreement, a taxpayer may choose to Opt-Out of OVDP. The election to Opt-Out of the OVDP must be delivered in writing to the revenue agent. Following the receipt of the Opt-Out letter by the revenue agent, the IRS sends the taxpayer Letter 4728 setting forth the status of the OVDP certification and if known, details of the tax, penalties and interest that would be due under OVDP. The taxpayer has 30 days to respond to Letter 4728. If the taxpayer does not respond within 30 days the Opt-Out election becomes irrevocable and the IRS issues Letter 4564 notifying the taxpayer that their election to Opt-Out of OVDP is irrevocable.
Once an election to Opt-Out is made, the revenue agent on the case prepares a preliminary report which summarizes of the case and provides a recommendation regarding the appropriate handling of the case outside of OVDP, the appropriate income tax due, the related income tax penalties, and whether the FBAR penalty should be calculated as willful or non-willful. Taxpayers prosecuted for willful failure to file and FBAR can be subject to both criminal sanctions (i.e. imprisonment) and civil penalties equal to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six years.
The revenue agent’s preliminary report is sent to a centralized review committee for the decision on how the IRS will proceed. If the case is assigned to a full-scope standard IRS audit, the taxpayer will be interviewed to finalize the exam process and procedure. The revenue agent performing the audit is generally required to examine all open years included in the taxpayer’s OVDP submission.