Top 10 factors to consider before deciding to opt out of OVDI or OVDP

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.

Opting out of OVDI or OVDP is irrevocable. Therefore, the taxpayer must only do so when it is clear that this course of action will produce a better result, considering all facts and circumstances. 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 the process of deliberating with the IRS agent assigned to a submission made under OVDI or OVDP, the IRS will be in a position to gauge the strength of the taxpayer’s reasonable cause argument, which will in turn influence the taxpayer’s decision to opt out or stay in OVDI or OVDP. Therefore, you should wait to opt out until after the taxpayer has had a chance to confer with the IRS agent assigned to his case.

Factors that the taxpayer must consider before deciding to opt out include the following:

1. OVDI and OVDP provide the taxpayer with certainty with respect to the magnitude of the penalties to be assessed and assurance that such penalties will not be greater than could otherwise be applied (including penalties related to significant US tax and reporting deficiencies for tax years prior to 2009). Opting out could expose the taxpayer to additional penalties.

2. Protection from the risk of criminal prosecution if they remain in the OVDI and OVDP. If there is a chance of a willfulness finding, you should probably stay in in the OVDI and OVDP.

3. The OVDI and OVDP do not permit the taxpayer to use the “reasonable cause” defense to the application of penalties. However, remaining in the programs (at least for the time being) the taxpayer could try to “test the waters” with the IRS during the OVDI and OVDP examination process for the purpose of gauging the quality of his “reasonable cause” arguments for the full abatement of all penalties.

4. When the taxpayer’s OVDI or OVDP submission has been examined he will receive a Form 906 closing letter from the IRS which will close the statute of limitations on all returns and forms filed under OVDP or OVDI. Absent the closing letter, the statute of limitations will typically expire after 3 years in many cases and 6 years in other cases.

5. The extra cost of professional fees required to opt out and whether such fees outweigh the benefits of doing so. It makes no sense to start a fight over $1000 if the fight will cost $5000.

6. The extra time of opting out could lengthen your case for many more months (or years). If the stress of the process is intolerable, the shorter process may be preferred.

7. OVDI and OVDP require the taxpayer to prepare of 8 years of returns, however if the taxpayer opts out and is audited he may be required to prepare several additional years of returns.

8. There are risks from an audit. If you have other issues that can be discovered then OVDI (which typically focuses only on offshore asset/income issues) may be preferred.

9. Your confidence in your tax attorney. Experience matters. Even though every case is different, tax attorneys overseeing a large number of OVDI cases will have greater case-based experience (and opportunity) to compare your possible opt-out outcome to others.

10. Sympathy of your case. A well drafted opt out letter strategically presents the legal arguments carefully woven with the facts of your case to sympathetically portray your case as one with no or low penalties.

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