Is Opting-Out of the (New) Voluntary Disclosure/VDP Penalty an Option?
Can I Opt-Out of the Voluntary Disclosure (VDP) Penalty: While the new voluntary disclosure program for offshore disclosure is designed to help US Taxpayers with unreported foreign accounts, assets and investments safely get into offshore compliance — it is much different than it’s predecessor, OVDP. Voluntary Disclosure is a highly specialized area of tax law — and unfortunately, some Tax Practitioners and Attorneys who do not really specialize in this area of international tax law are all too quick to throw their clients into the new VDP program, under the idea that they can just “opt-out” — and later down the line seek a non-willful penalty reduction similar to how the prior OVDP worked — but that is not the case — and it can be very dangerous and financial damaging to unsuspecting Taxpayers. One difference between old OVDP and new OVDP/VDP is the Opt-Out (or lack thereof of a formalized opt-out procedure).
What is Opting Out Under OVDP?
Under the prior OVDP (discontinued 9/2018), Taxpayers were hit with a set penalty amount. The penalty was 27.5% for the year with the maximum value of unreported accounts/assets within the 8-year OVDP compliance period. And, if any of the money was in a bad banks then the entire penalty shot up to 50% for all accounts.
For many applicants to the OVDP program, this penalty was unfair. Therefore, the IRS provided an alternative route, in which the Taxpayer could Opt-Out of the OVDP penalty, but remain in the Program — and seek a penalty reduction or waiver. It was a very difficult process, but we are proud to say we were successful on several occasions in getting the penalty reduced and even eliminated.
The idea behind the opt-out was that:
Before stand-alone Streamlined was available (mid-2014), OVDP was for willful and non-willful Taxpayers; and
Even after the stand-alone Streamlined was available, some non-willful Taxpayers sought to go OVDP instead of Streamlined — in order to get compliant for more years than available under Streamlined, receive a 906 closing letter – and avoid audit.
Can I Opt-Out of New VDP?
Currently, there is no formalized opt-out procedure under VDP. Nearly all Taxpayers who submit to VDP are willful. And, rather than there being a set penalty amount, the IRS Agents are directed to go by the IRM (Internal Revenue Manual) guidelines in accordance for willfulness penalties. Under the IRM guidelines, the willfulness penalties are typically 50% of the maximum value with a $100,000 floor (adjusted for inflation). And, while Taxpayers get the opportunity to seek a lower penalty, the IRS generally holds firm on the 50% penalty.
Be Careful of Incorrect Information About VDP and Opt-Out
Some Tax Professionals recommend VDP over Streamlined (Even when the Taxpayer is clearly non-willful) just so that they can up-charge the Taxpayer, and scare the Taxpayer into believing they need protection from a criminal investigation — when in fact the Taxpayer is clearly non-willful and at no risk for a criminal investigation. The Tax Professional then claims that they can try to negotiate the willfulness penalty down to non-willfulness at a later stage – but this is rarely possible. Once a Taxpayer submits under the New VDP, they are essentially taking the position they are willful – and a formalized opt-out similar to prior OVDP is not currently available. The submission is much more complicated than a Streamlined submission, and while the Taxpayer can always try to negotiate the penalty, the IRS will usually stay firm on the 50% penalty, with the idea that the real benefit to Taxpayers is that they will not be criminally prosecuted —
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
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