Tax Law Center Blog

Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI) or 2012 Offshore Voluntary Disclosure Program (OVDP), the 2012 program gives no discretion to the IRS agents to reduce penalties. If a participant does not believe that he or she should have to pay the 27½% penalty, their only choice is to “opt out” of the program, in which case the IRS will evaluate the file for a potential audit and imposition of appropriate penalties.

The 2012 OVDP program continues the procedures announced in 2011 regarding decisions to “opt out” of the voluntary disclosure penalty structure. Pursuant to FAQ 51 of OVDI and OVDP, the taxpayer can opt out of the program at any time before signing the final closing agreement with the IRS.  In such a case, IRS agents are instructed to neither punish nor reward persons who choose to opt out. Once an irrevocable opt out decision is made, our law firm and the IRS agent responsible for the examination each prepare written submissions regarding a proposed penalty resolution.

Our law firm has had several successful opt outs for clients. For some taxpayers, we have reduced the 25% OVDI penalty by 50-100% (sometimes hundreds of thousands of dollars). In the opt out process, we comprehensively research the applicable penalties and mitigation opportunities to reduce the penalties.  We prepare a legal brief arguing for a lower or no penalty and provide the reasons for the reduction.

In our experience, good facts applied to the law will result in a good opt out result.  IRS agent provides a written submission regarding a proposed penalty resolution to a committee of senior IRS personnel, who then decide on the nature and extent of any ensuing examination.  In many cases, the committee accepts the IRS agent recommendation.

When a penalty does not change through an opt out there is still hope because an appeal is available to contest an OVDI opt-out penalty.  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.

Regardless, while opting out of the OVDI or OVDP amnesty programs may result in a reduction of penalties that may otherwise be assessed, the taxpayer needs to carefully weigh the numerous consequences before doing so. Responsible tax professionals should discuss the consequences of opting out with the client before making such a recommendation.

Patel Law Offices has consulted with dozens of clients regarding opt out decisions of their OVDI applications. 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.