Reasons to “Opt Out” of the Voluntary Disclosure Progam

Explore:  OVDP

One of the questions that taxpayers in the Offshore Voluntary Disclosure programs ask is should I “opt out” of the program if the penalty is unacceptable to me. The question often arises in the context of value of assets other than financial assets being added to the penalty base by the IRS.

In IRS Frequently Asked Question 36 the IRS takes the position that “if assets produced income subject to U.S. tax during the voluntary disclosure period (2003-2011) which was not reported, the assets will be included in the penalty computation regardless of the source of funds used to acquire the assets”. Translation, if you have offshore assets, like real property, or business interests on which you did not report income the VALUE OF THOSE ASSETS will be included in the penalty base.

Let’s take a simple example, assume a taxpayer has unreported foreign financial accounts with a balance of $100,000 and income from foreign owned real property of $5,000. Assume also that the real property is worth $1,000,000. The penalty base calculation for the 2012 Offshore Voluntary Disclosure Program (OVDP) is 27.5% of $100,000 PLUS 27.5% of the $1,000,000 for a total penalty of $302,500. If the taxpayer elects to “opt out” then assuming the act of failing to file a Report of Foreign Bank Account (FBAR) there are two possible results. First, if the the failiure to file the FBAR’s was based upon advise of a professional (reasonable cause) there is a possibilit of no penalty being imposed. Second, if the failure of file an FBAR was based upon “non-willful” conduct, like the taxpayer did not know of the obligation to file and FBAR, then the non-will penalty of $10,000 per account per year may be applied to one or more years. This example assumes that the taxpayer is otherwise able to get through an income tax audit with limited risk and has no other unfiled information returns.

If the taxpayer has unfiled information returns, as a result of unreported foreign gifts or bequests in excess of $100,000 or unreported foreign trust income or unreported controlled foreign corporations then the taxpayer needs to weigh “opting out” against the risk of the imposition of these penalties on audit.

For some taxpayers, an “opt out” decision makes sense and for others it will be very troublesome. This note is just an illustration of how to approach the problem. All cases are facts and circumstance driven and some may have criminal exposure in addition to civil penalties.


Written by:

Published In:


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »


Sanford Millar
Law Offices of Sanford I. Millar

Experience and Qualifications: Over 30 years of experience in domestic and international tax... View Profile »

Follow Law Offices of Sanford I. Millar:

Reporters on Deadline

All the intelligence you need, in one easy email:

Great! Your first step to building an email digest of JD Supra authors and topics. Log in with LinkedIn so we can start sending your digest...

Sign up for your custom alerts now, using LinkedIn ›

* With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name.