Opting Out of the Offshore Voluntary Disclosure Initiative (OVDI)

June 25, 2011 by  Filed under: Taxes 

In its drive to raise more taxes from foreign incomes, the IRS has been running an amnesty program dubbed the “2011 Offshore Voluntary Disclosure Initiative” (OVDI). This initiative allows foreign income tax defaulters and those who have not been filing the Foreign Bank and Financial Accounts (FBAR) Form to come into compliance with the IRS and face less-harsh consequences. The OVDI amnesty initiative enables the taxpayers to pay a percentage of the balance in their foreign accounts and pay any due taxes, coming clean with the IRS.

Penalties under OVDI

Individuals who have had a balance of over $75,000.00 at any time in their foreign accounts from 2003 to 2010 and have not made FBAR disclosure will need to pay 25% of the highest balance in the account within this period under the OVDI amnesty. For those whose account maintained a balance below the cap of $75,000.00, the penalty goes down to 12.5% of the highest balance between 2003-2010. For those whose foreign accounts comprise of an inheritance, the penalty goes down to 5%. These amnesty penalties waive the FBAR penalties and penalties for non-payment of foreign income taxes that would otherwise apply if the standard rules were in place. However, the taxpayer who opts for the OVDI option will also need to pay any due taxes from any incomes from foreign accounts including interests. They are also expected to pay an extra 20% of the taxes due as an accuracy penalty, including any interests on this penalty.

Opt Out Option for OVDI

For some taxpayers, paying the OVDI penalties may end up being more than if they underwent a regular IRS audit and paid the standard penalties. For this reason, the IRS is now providing an option for such taxpayers to opt out of the amnesty initiative and face a standard audit procedure. The IRS has also given guidelines for any taxpayer who wishes to opt out of the OVDI program. Some of these rules are:

  • Disclosure Rule – Before opting out, one will need to make a full disclosure of foreign accounts. The IRS will provide you with a letter that details the documentation that you are required to disclose before the opt-out. Any missing disclosure information as requested by the IRS will need to be forwarded in 30 days. If your disclosure is complete, then the IRS will provide you with the details of the penalties, taxes, and interest that you will owe under the OVDI. This will help you make a decision as to whether to opt out.
  • 20 Day Notice for Opting Out – Once disclosure issues are complete, the IRS will send you a letter informing you that opting out is irrevocable and that it must be formally put in writing. After the receipt of this letter, you will have 20 days to write a letter formally requesting the opt-out of OVDI
  • Formal Request for Opting Out – If a taxpayer makes his or her analysis and finds that he or she is better off opting out, a formal letter should be written to the IRS requesting for the opting out option. The taxpayer will need to show the penalties, taxes, and interests that they believe that they should pay for non-compliance.
  • IRS Response – Once the letter is received, an IRS employee reviews your case and comments on the taxpayer’s review of his or her case. The employee may either agree or disagree with this view and also make a suggestion towards the extent of an IRS audit that will be conducted. The IRS employee then forwards the summary to a central committee that reviews the case and determines whether to audit the case as a civil or criminal issue.

The IRS states that no taxpayer will get punished or rewarded for opting out. However, opting out will mean that the IRS will have all the information they need for a successful audit and to pursue penalties. However, for some taxpayers, opting out will reduce the amount of penalties that they will pay in coming forward with the IRS.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. http://www.limonwhitaker.com / Tel:888.321.6188

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