Offshore calculations, part 2: Why are some opting out of OVDP?

The IRS has been remarkably successful in getting people to enter its limited-amnesty program for undisclosed offshore accounts.

In the first part of this post, we took note of some of the reasons for this. The Offshore Voluntary Disclosure Program (OVDP) has seemed to offer the opportunity to reduce the risk of criminal prosecution for undisclosed accounts and to gain certainty about the extent of applicable tax penalties.

Why is it, then, that so many offshore account holders appear to be having second thoughts, with some even choosing to withdraw from the program?

A key factor may be the IRS's introduction in 2014 of a streamlined procedure by which taxpayers can come clean about lack of offshore compliance. Under Streamlined, a taxpayer can certify that their failure to meet foreign-asset reporting requirements was not due to "willful conduct."

The penalties under Streamlined are generally not as stark as under the OVDP. In particular, the overall asset-based penalty under OVDP can be up to 50 percent of the accounts' highest balance. This can make for much stiffer penalties than under Streamlined, where the asset-based penalty is no more than five percent and in some circumstances may be zero.

What about people who have already entered the OVDP program? Offshore account holders could potentially save big money by opting out of the program and its stiff penalties.

This is, however, a decision that must be made with considerable care. Withdrawing from the OVDP could put criminal prosecution back in play as a possibility. Though there have not yet been reports of this happening, it is still conceivable.

It is also unpredictable what tax penalties the IRS would seek to impose on someone who opted out of the OVDP. If there are facts that the IRS could interpret as indications of "willfulness" or apparent tax evasion, the risk of such penalties naturally rises.

In short, opting out of the OVDP may or may not be a wise. With so many uncertainties, it's a choice best faced with counsel from a knowledgeable tax attorney.


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