Appeals of penalties imposed during the Offshore Voluntary Opt-Out

When a taxpayer has a tax increase though a civil tax audit (or examination, in IRS terminology), a taxpayer has the right to appeal that increase administratively and through court, if unsuccessful administratively.  For taxpayers not willing to accept the 27.5% FBAR-equivalent penalty, they may opt-out of the standard FBAR penalty scheme and argue for less, by showing a lack of willfulness or reasonable cause in not filing FBARs and not reporting income earned abroad.  The IRS examiner will recommend a penalty amount in the Opt-out penalty assessment stage.

Is there any appeal available to contest an OVDI opt-out penalty?

Yes. Opt outs are essentially audits, and audit determinations can be appealed in the same manner as lesser court rulings, and in many cases, the Office of Appeals overturns (or at least modifies) the findings of the original audit in the taxpayer’s favor.

The IRS understands that many taxpayers will not agree with the findings of its auditors. Therefore, it has created a separate branch of service called the Office of Appeals, which consists of approximately 2,000 employees located nationwide. Most of them were auditors themselves, at one time, but are now senior employees in the IRS system, and they usually have legal or accounting experience. Their sole function is to review finished examination reports and provide an impartial platform for taxpayers to plead their cases to a higher power within the IRS. They attempt to avoid litigation by resolving tax disputes internally in a way that foments future voluntary taxpayer compliance with the tax laws.

Appeals officers have greater authority and flexibility in deciding cases than auditors. Their competence is in fact judged by how often they are able to reach a successful compromise with taxpayers, and not by their willingness to back an auditor’s findings.

No developments yet.

There are very few (or zero) OVDI cases in Appeals as of now.  Our discussions with the IRS indicate that there are presently no opt outs in Appeals. Once in appeals they likely will be handled as Appeals Coordinated Issues to assure national consistency. An Appeals Coordinated Issue is a national IRS strategy whereby the National IRS Office has removed most discretion from local appeals offices on these cases. Any willingness to settle any case under OVDI will likely be made exclusively by National Office compliance national managers and their staff, the highest levels the Office of Chief Counsel, and the national director of Appeals.

Advocacy

Our office intends to aggressively advocate for our client’s interests in Opt outs outside of the OVDI program. We expect good results for taxpayers in appeals.

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