Tax Law Center Blog

The 2012 National Taxpayer Advocate (NTA) Annual Report to Congress criticized current IRS practices in the Offshore Voluntary Disclosure Program (OVDP) that hinder voluntary compliance by penalizing taxpayers who are entitled to a reasonable cause exception from willfulness.

One of the major complaints of the 2011 OVDI was that penalty presumed willfulness. Many taxpayers and practitioners viewed the penalty as harsh because willfulness, especially in the case of FBARs, is the government’s burden to prove. The 2012 OVDP attempted to address the criticism received from the 2011 OVDI. Specifically, FAQ 51.1 (of the 2012 OVDP) provides that benign taxpayers who have reasonable cause for their failure to file certain tax returns may be better off by first applying to the OVDP program and subsequently opting out of the civil settlement structure.

According to the FAQs, opting out of the civil settlement structure does not affect the status of a taxpayer’s voluntary disclosure under Criminal Investigation’s Voluntary Disclosure Practice, so long as the taxpayer is fully cooperative in the examination process, by providing all requested foreign records and submitting to interviews, as requested, and as long as no new issues are uncovered that were previously not disclosed.

Taxpayers who follow an “opt out” path in offshore voluntary disclosures (i.e. taxpayers who enter OVDP but subsequently opt out of the program’s civil penalty structure) are generally disadvantaged because they are subject to extended resolution times over smaller amounts when compared to traditional offshore voluntary disclosure participants, the report said.

The average time to resolve OVDP submissions for taxpayers who elected to remain within the program’s civil settlement structure was about 300 days. For participants who opted for the path envisaged under FAQ 51.1, however, the average resolution time (if the case has been closed at all) was approximately 550 days.

Therefore, the OVDP process burdens taxpayers eligible for a reasonable cause exception (e.g. more compliant taxpayers) by processing participants not eligible for the exception (e.g. presumably less compliant taxpayers) through the program more quickly, the report said.

Participants eligible for FAQ 51.1 relief usually involved smaller amounts (compared to participants who did not qualify for such relief), usually averaging about $15,000. The prolonged time for settlement generally meant that such participants incurred significantly higher representation fees compared to those who did not seek to opt out of the civil penalty structure.

Patel Law Offices has consulted with hundreds of clients regarding their offshore assets. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.