On June 2, 2011 the IRS issued a new series of Frequently Asked Questions (FAQ’s 51.1-53) which provide advice on when it is better to “opt-out” of the Offshore Voluntary Disclosure Initiative (“OVDI”) The FAQ’s presume that the taxpayer has made a voluntary disclosure under the 2009 or 2011 programs. The purpose of the voluntary disclosure is to provide reasonable assurance to a taxpayer who comes forward, before an investigation is started, that if they truthfully disclose all facts and circumstances about their unreported account and all unreported income, they will be relieved of the risk of prosecution. The FAQ’s provide guidance on when, in the opinion of the IRS, taxpayers can or should the “opt-out” and when they should not. The missing element in the FAQ’s is whether the taxpayer should or should not enter the OVDI program at all. Not entering the OVDI program is necessarily a very serious decision and should only be made with advice of counsel.
An example of someone who may consider not entering the OVDI is a “dual national” who lives abroad and has fully reported all income in the other country, and has filed U.S. tax returns and has omitted interest income earned in financial accounts held in the other country. If, after all tax credits are applied, there is no U.S. income tax due, then the risk of prosecution is likely to be low. This person may just want to file the unfiled FBAR’s with a reasonable cause explanation.
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