Baker Hostetler’s lawyers have handled hundreds of voluntary disclosures through the 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDI).  Recently, the IRS has announced a third OVDI, this time with no defined termination date.

The OVDI programs provide important protections for those who might face criminal prosecution for unreported income or unfiled informational returns.  The OVDI programs also provide certainty regarding the level of civil monetary penalties that will be imposed.  In the current OVDI Program, penalties are relatively high (although they are somewhat lower than a civil “fraud” penalty), and there is no leeway for appeal or negotiation in the Program.  It is a relatively rigid process in which the taxpayer is required to provide certain information at certain times.  In addition to taxes and interest, accuracy penalties are imposed at a rate of 20% of the tax liability, plus 27.5% of the fair market value of the offshore assets giving rise to the unreported income. 

It has been our experience that certain taxpayers may be able to lower their civil monetary penalties through a non-OVDI audit process.  For such taxpayers, the taxpayer can withdraw or “opt out” from the program at the appropriate time after making the required disclosure to the criminal tax authorities.  This approach may be beneficial if there are substantial legal issues or doubt may be raised as to a taxpayer’s liability for particular amounts.  What is best depends on the taxpayer’s situation and his or her specific facts.

In particular, we learned in the previous OVDI Programs that some taxpayers, including certain immigrants, should carefully consider entering into the OVDI Program and then opting out.  One potential benefit of opting out may be the possibility of obtaining certain retroactive restructuring relief, an outcome that may not be available to taxpayers in the formal OVDI Program.  While not everyone can obtain a dramatically better result or retroactively restructure their holdings, paying close attention to a taxpayer’s particular facts and circumstances has the potential to create a less negative outcome.

An article discussing the IRS position on retroactive relief for OVDI taxpayers can be found here: http://www.bakerlaw.com/files/Uploads/Documents/News/Articles/TAX/2011/TaxNotesToday_Littman_Nydegger_3-2011.pdf

A brief description of the article appears here:  http://www.bakerlaw.com/articles/littman-and-nydegger-publish-article-tax-analysts-tax-notes-today-3-9-2011/