Opt out (of the OVDI) and get out (of the USA)


Posted by:
Phil Hodgen

Written on:
July 10, 2013

Posted in:
Expatriation
Voluntary Disclosure

We get questions. This one came as a comment to a prior blog post. Lightly edited, it says:

I am a dual citizen in middle of OVDI and was planning to return to my home country for personal reasons. Have paid back taxes but haven’t gotten to point of deciding whether to opt out. Should I wait until its resolved? Can I negotiate better from a foreign country?

Here’s the answer.

I have no idea about your situation and your OVDI. I don’t know whether you are one of the many ordinary people who entered the OVDI with good intentions only to have see the true glory of the train wreck that is the OVDI process.

OVDI_Outcome_Illustrated

Or perhaps you are one of the few people for whom the OVDI process makes sense: it is better to give the government a lot of money than spend years in fear. Or in prison.

Again, I don’t know.

Here is what I do know. We had a metric ton of Voluntary Disclosure cases. We took the opt-out route on a very significant number of these cases. For your specific question — will you get a better deal if you are outside the United States or inside the United States? — I would guess that the answer is “It doesn’t matter.”

The agents are going to apply the rules. That is the glory of the IRS. “Rulez is Rulez.” Unless of course the Rulez were accidentally broken for political or other reasons. Oh hi, NSA and IRS. I will stop now. Hat tip to Patterico who notes that some at the IRS see themselves as motivation coaches.

Here’s my recommendation. Hire an experienced lawyer who has done a bunch of these cases (don’t hire me; I’m not taking on any of these cases). Get advice on the “opt-out” vs. “pay the OVDI penalty” for your OVDI case.

We have seen Revenue Agents follow the procedures in the Internal Revenue Manual very carefully in handling opt-out cases, and have seen actual touches of human kindness and consideration from time to time from Revenue Agents. If you are a normal person I think it is entirely possible that you will get a better result (i.e., pay lower penalties) in the opt-out than you will in the OVDI.

You didn’t say whether you plan to terminate your U.S. citizenship or not when you return to your home country. People sometimes think that they’ll just drop the U.S. passport and never come back to the USA. What’s the IRS going to do — chase them all the way to Kyrgyzstan and attempt to collect taxes?

We have squillions of brain cells in our office dedicated to Section 877A and expatriation. My only advice to you (and others) who are going through the expatriation process is this: remember your Primary Purpose to exit the United States cleanly, so you can move about the planet freely for the rest of your life. Don’t f— that up by playing games with your taxes.

“Your money or your life?” That is the question you are being asked. Choose life.

 

 

Comments

CDF says:

Phil, I am the one who asked the question.

First, thank you very much for writing a whole blog post about this.

In my situation the original money came from outside the US and foreign taxes were paid on it, I just left the money there. I did not report the interest on my US return, but the total back taxes for the past 8 years were a little more than 3% of the high balance. I also paid the accuracy penalty and interest. That much is fair, I’m not complaining.

But I also didn’t have shell companies and I didn’t send money to or from the foreign account and the US, so I think 27.5% is not fair.

Finding a lawyer who did a lot of OVDI cases is easy. What’s hard is finding someone with optout experience. My lawyer’s firm has done hundreds of OVDI cases but less than 1% of them have opted out, the slam dunk ones, like so0meone with dementia. After spending $20K on legal fees the only answer I get is “Dunno, you could get a 50% penalty, or 0% or anything in between.”
The optout process appears to be extremely subjective with no clear guidelines and a lot seems to depend on chance (that is, whatever agent you happen to be assigned to.)
Also if I opt out my file gets transferred to a different IRSoffice with a different agent than the one who did the certification so even if he wanted to the agent who did the certification can’t give me even a hint.

I know I’m not unique, lots of people are in my shoes.

As to renouncing I haven’t given it much thinking, since I plan to leave for personal reasons.

Phil Hodgen says:

Most lawyers don’t want to choose opt-out because they are afraid. They are afraid of being sued for malpractice. By you. :-(

I don’t know the particulars of your case, so I can’t tell you what you would get in an opt-out situation. But as I said in the blog post, we did a few dozen opt outs (I forget the number) and on the whole they went well. The taxpayers experienced evenhanded treatment from the Revenue Agents in the opt-out cases I handled. The Revenue Agents are obliged (it’s in the procedure manual!) to yell “Scary Monsters! Run Away! Run Away!” at you. Understand that they are working from a script.

The evenhanded treatment of the Voluntary Disclosure Program–which looks approximately like a guillotine to me.

If you want to find someone to help with the opt-out, and you can’t find someone who will say–out loud–that they’ve done a lot of opt-out voluntary disclosure cases (as I have), find a lawyer who has taken on criminal tax evasion cases of any type. This will be someone who is not afraid to look into the fog of war and say “Let’s march forward.”

Just Me says:

Check TAX NOTES, July 15, 2013. I am sure you subscribe. There is an article entitled “The Personal Impact of Offshore Enforcement”
By Marie Sapirie — msapirie@tax.org

There are several Opt Out stories there that might be of interest to your readers. It is copy righted.

Chris says:

@CDF, Several people, 2 immigrants as well as one americans living abroad have extensively documented their opt out procedures and reasonable cause arguments.
That should be all you need for an opt out.
If things turn bad and they still impose unreasonable penalties, you can involve the national tax payer advocate.
Their screen names are moby, ij and not that lisa
http://isaacbrocksociety.ca/2012/03/10/moby-opt-out-update/
http://isaacbrocksociety.ca/2012/09/16/a-minnow-opts-out-of-the-irss-ovdi-and-gets-the-correct-result-a-simple-warning-letter/
http://isaacbrocksociety.ca/2013/06/16/an-irs-ovdi-ordeal-with-a-happy-ending-an-opt-out-success-story-as-told-by-not-that-lisa/

Hope this helps.

Lee says:

I think the big concern that CDF and everyone else has regarding optout isn’t whether it’s possible to get a better result or whether that possibility is 10% or 90%; the big fear is that penalties might end up being much higher, and no one seems to know how much higher or under what circumstances.

Phil Hodgen says:

True.

The OVDI vs. opt-out decision is not easy. The OVDI, at least, offers certainty. The opt-out strategy means uncertainty.

When I was doing these cases I told people to look at the worst-case, best-case, and likely outcomes from opting out. What are the expected dollar costs of these outcomes in terms of penalties?

Then as a discrete next step, figure out which outcome you are likely to get? Are your facts so bad that you risk the “worst-case” outcome? Is is reasonable to expect the “best case” outcome? These are judgment calls. They should be made by a lawyer who has had a lot of experience and can compare your situation against his/her experience. Hint: most people fall into the “likely” category. Life is a cabaret bell curve and usually it is rational to guess that you are in the middle of the bell curve. But get a professional’s judgment on this.

Compare the penalty cost outcomes. OVDI vs. your best guess for outcomes on an opt-out. OVDI will be higher. The expected savings in penalties is what you are buying. Uncertainty and risk is the price you are paying. You now make a gut call — can you live with uncertainty and risk during the audit that follow an opt-out?

As I said, our experiences have been (on the whole) positive for the taxpayers. But every day brings new revelations of tremendously skanky behavior at the IRS for political reasons. The stench of corruption continues to spread upwards at the IRS.

I’ll offer one more thought. Before you even got to questions about opt-out experience (personally, mine is modest) I would see what the lawyer has written about OVDI/OVDP in general. There are lots of guys out there with articles (ads) that would have you believe every single person with an offshore account problem needs to make a voluntary disclosure. If they don’t acknowledge that the question of whether to make a voluntary disclosure is entirely dependent on the particular facts and circumstances involved, they certainly can’t help you with an opt out. If you encounter one of these people, run. Run fast, fun far.

AbusedUSCitizenAbroad says:

Read the comments about OVD and citizenshipbased taxation in this interview with Willard Yates

http://blogs.angloinfo.com/us-tax/2013/07/22/residence-based-taxation-interview-with-bill-yates-former-attorney-office-of-associate-chief-counsel-international-irs-2/

Example:
….”I had no part in OVDI, although I was part of a group that reviewed the OVDI FAQs.

Let’s talk about US tax: What was that like?

Yates: In the law dictionary where it lists “arbitrary and capricious,” the definition says, “See IRS OVDI FAQs.”

Let’s talk about US tax: Do you think the IRS will modify future OVDI programs as suggested by the RBT Proposal?

Yates: I doubt it. Apparently, the program has been successful in bringing in approximately $5 billion in back taxes and penalties. And, believe me no one at the IRS Field level is going to speak up about the inconsistencies inherent in OVDI as far as “accidental citizens” are concerned. I have good friends in the Field that didn’t agree at all with what their managers were telling them to do. They had no choice, other than to do what they were told. These are really talented, fair-minded people who are being marginalized. They aren’t out to “get” Joe Blow taxpayer. They want to get the big guys, the guys with the money who are cheating Joe Blow taxpayer through tax evasion.

You have to wonder how much more could be brought in if future OVDIs were less draconian. Earlier, I said that the OVDI had made a lot of taxpayers angry. At least, that’s what I heard. Apparently, a lot of taxpayers living overseas decided that the IRS OVDIs were totally unfair and way too risky. So, they decided to take their chances and not come forward at all….”

…”The OVDIs caught up a whole lot of people who were totally unaware of their U.S. filing requirements. How could they have been? And, FATCA is hitting U.S. taxpayers living overseas with unforeseen consequences, such as having their foreign bank account(s) closed….”….

…..”….What Congress has to realize is that the current citizenship-based taxation creates a serious competitive disadvantage for the United States and that if FATCA remains, CBT for Americans living and working abroad has to go. Otherwise, having a US passport overseas is simply too much of a liability to keep. Over 80% of Americans abroad are long-term overseas residents, married to foreigners, working abroad. Many have dual nationality – some even born with it. Why should they have to continue to double file, double pay when all of their governmental services come from the country where they reside? CBT does great harm to the US because it prevents US corporations from sending Americans abroad to represent US interests. More freedom of movement of US citizens would enhance US competitiveness around the World”

LeaveUSCitizenshipBehind says:

http://blogs.angloinfo.com/us-tax/2013/07/22/residence-based-taxation-interview-with-bill-yates-former-attorney-office-of-associate-chief-counsel-international-irs-2/

Residence Based Taxation? Interview with Bill Yates – Former Attorney, Office of Associate Chief Counsel (International), IRS
July 22, 2013

“Today’s blog post is the second of a two-part interview that provides valuable insight from Willard (Bill) Yates, who recently retired from the Office of Associate Chief Counsel (International), Internal Revenue Service after 31 years of service”….

…”..I had no part in OVDI, although I was part of a group that reviewed the OVDI FAQs.

Let’s talk about US tax: What was that like?

Yates: In the law dictionary where it lists “arbitrary and capricious,” the definition says, “See IRS OVDI FAQs.”

Let’s talk about US tax: Do you think the IRS will modify future OVDI programs as suggested by the RBT Proposal?

Yates: I doubt it. Apparently, the program has been successful in bringing in approximately $5 billion in back taxes and penalties. And, believe me no one at the IRS Field level is going to speak up about the inconsistencies inherent in OVDI as far as “accidental citizens” are concerned. I have good friends in the Field that didn’t agree at all with what their managers were telling them to do. They had no choice, other than to do what they were told. These are really talented, fair-minded people who are being marginalized. They aren’t out to “get” Joe Blow taxpayer. They want to get the big guys, the guys with the money who are cheating Joe Blow taxpayer through tax evasion.

You have to wonder how much more could be brought in if future OVDIs were less draconian. Earlier, I said that the OVDI had made a lot of taxpayers angry. At least, that’s what I heard. Apparently, a lot of taxpayers living overseas decided that the IRS OVDIs were totally unfair and way too risky. So, they decided to take their chances and not come forward at all….”…..

…..”…What Congress has to realize is that the current citizenship-based taxation creates a serious competitive disadvantage for the United States and that if FATCA remains, CBT for Americans living and working abroad has to go. Otherwise, having a US passport overseas is simply too much of a liability to keep. Over 80% of Americans abroad are long-term overseas residents, married to foreigners, working abroad. Many have dual nationality – some even born with it. Why should they have to continue to double file, double pay when all of their governmental services come from the country where they reside? CBT does great harm to the US because it prevents US corporations from sending Americans abroad to represent US interests. More freedom of movement of US citizens would enhance US competitiveness around the World…”….

Frank says:

As a victim who had just lost $400,000 in 14 days, DO NOT DISCLOSE! The “formula” IRS use is on purpose designed to extract the maximum amount of money from your account! As mentioned, if you opt out, you won’t be able to sleep at night. You will never know when they will call and request documents and if you failed to produce, you will be in big trouble.

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