September 9, 2011 was the last day to submit to a letter request to enter Offshore Voluntary Disclosure Program (OVDI). According to the most recent IRS announcement, at least 11,000 such requests were filed. Some taxpayers will file “opt out” requests believing that they can get a better deal outside the OVDI program than the 25% Miscellaneous Civil Penalty applied to the highest single year foreign account balance. Why would such an presumption be true?
The IRS in its OVDI Frequently Asked Questions (51.1) suggests that some taxpayers, meeting the specific fact pattern should “opt out” as the total penalty calculation will be less under the FBAR civil penalty program. In fact, outside the specific fact pattern, taxpayers need to consider the option of “opting out” based upon several factors. First, the IRS examiner has broad discretion in making penalty decisions. Such decisions must be made in accordance with specific provisions of the Internal Revenue Manual, which states:
“Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBAR’s, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future” Does this mean that in any given case, an IRS examiner will not propose a penalty, hardly. But it does provide the basis upon which all the facts and circumstances of the non-compliance can be considered. In those cases where the facts are compelling an “opt out” may result in no penalty being assessed. This approach is more than a “reasonable cause” argument.
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