How to get an OVDI payment plan you can live with
For many US taxpayers considering whether or not to enter in to the IRS Offshore Voluntary Disclosure Initiative/Program (OVDI/OVDP), one of the biggest concerns is — what if I am forced to accept a 27.5% FBAR-equivalent offshore penalty? What if I am stuck with a bill that I can’t afford to pay?
We’ve written extensively about why the 27.5% offshore penalty is unlikely for the majority of OVDI participants, but for the purposes of putting the potentially millions of ex pats, dual citizens and visa holders who need to use some form of the IRS Voluntary Disclosure (standard 2012 rules, streamlined OVDI, or just late FBAR filing) at ease, this article outlining OVDI payment plans is for you.
First thing: The rules for IRS tax negotiations are exactly the same with OVDI/FBAR debts as with any personal tax debt.
It is not a crime to owe the IRS money. So if you can not pay your OVDI penalty in full, this will not kicked you out of the program, this will not bring up criminal charges (What is a crime is concealing assets from the IRS that could pay the liability). But in successful negotiations, it is being as completely aggressive within the well-established boundaries of the law. There is no lying or cheating involved. Successful IRS tax debt negotiation involves proper structure, documentation, classification of assets, liabilities, income and expenses, and then making the most persuasive argument that the amount after all reasonable living expenses are taken into account is as small as possible.
I will discuss the strategies and techniques we use to negotiate the optimum OVDI payment plan with our traditional IRS tax debt settlement clients, even for those who have assets higher than the national average.
Your OVDI offshore FBAR penalty becomes just like any other tax debt
Once your OVDI case is closed out and your debt is not paid in full, like we said, there is nothing special about an unpaid OVDI/FBAR penalty. As far as IRS collections is concerned, it is just like an unpaid 401(k) penalty. So all available options to settle the tax debt are available. And I will talk about them here.
If you have a lot of assets, but little equity: In this case, you would like want to negotiate an Installment Agreement. For a lot of our clients, they have the assets, but a forced sale will diminish the value, or the assets are held joint or in common with someone else who doesn’t have a tax problem. So stripping equity out, while possible, is less than optimal. If this is the case we would attempt to get the IRS to agree to the longest Installment Agreement term possible, to give the most flexibility and security so that the rest of their monthly obligations can be met.
If you have few or heavily encumbered assets, and a volatile or low monthly cash flow, your tax debts are fairly new: If this sounds like your position, then a Partial Payment Installment Agreement might be your best option. Essentially what is allows, is you to pay the IRS an amount, that won’t full pay the obligation in the remaining time the IRS has to collect the debt (that’s right, the IRS only has 10 years form assessment to collect on a debt). Or similarly, your monthly payment could be as low as $0 if your financial situation supports of “Currently Non-Collectible” status with the IRS. There are some other benefits to what we call a PPIA and CNC —especially when your assets large, but your liabilities larger, and I’l l talk about that next.
Your balance sheet is negative: Did you read how Dionne Warwick just filed bankruptcy for IRS tax debts? You would agree with me that Dionne Warwick is not poor, right? She likely has assets in songs, and in royalties future streams of income. Yes, she may have to reign in some expenses, but you would agree with me that overall, she won’t experience that big of a life-style change. Yet, she filed Chapter 7 bankruptcy. Now why did she do this? The answer is that bankruptcy has the potentiality to completely wipe out personal tax debts (it does not work for trust taxes like payroll trust fund recovery penalties). And the rules for discharging tax debt are not the same for discharging credit card debt. In fact, tax debt discharge rules are favorable. I am not a bankruptcy attorney, but we work with them all the time, and what I can tell you is it can really work. One caveat. You have to wait a certain amount of time to file bankruptcy. You can not discharge band new tax debts. And that’s why the PPIA I mentioned above is so helpful. It gets the IRS off your back until it is the proper time to file bankruptcy.
You want to get this behind you as soon as possible without bankruptcy and doubt the IRS would ever be able to collect the full amount: In this case, you an Offer in Compromise may be the best solution. You can absolutely file an Offer in Compromise on your OVDI or FBAR penalty. And just because you aren’t dead broke, doesn’t mean an Offer in Compromise can’t work. We have successfully negotiated Offers in Compromise for clients who have high assets and high income. The key to this negotiation is (1) planning (2) structuring affairs, legally, but also for your benefit (3) and documenting everything for the IRS’ review so that they have the information they need to rule on your favor.
Case in point: Let’s us suppose you got hit with a $1,000,000 FBAR penalty. And if we looked at one of your remaining bank accounts, we saw that there was a $1,000,000 in there to pay the IRS. So then, you should have to full pay your IRS tax debt in full, right?
Well before you answer that question, let me add some more facts to this hypothetical:
- you are currently making 1/3 of what you used to make.
- you have a sick child who has huge medical expenses and requires in-home care,
- you have no pension,
- you don’t have enough life insurance
- you don’t have medical insurance
- you yourself may have to retire soon
- the million dollars is all the money you have.
So now, sure, you could pay the IRS the entire million dollars, it is possible. But what happens after you do?
You are essentially ruined and you are putting your life and your child’s life at risk. So that million dollars, when spread out over your remaining life isn’t all that much money. And as invasive as the IRS is, guess what — no one there wants to see you live in misery or be forced on to welfare if it can be avoided. So if it can be presented to the IRS, that you need as much of that million dollars as possible, they very may agree to settle your tax debt for — forgive the late night TV come-on — a fraction of what you owe.
OVDI/OVDP and FBAR penalties can be quite large. But don’t let that discourage you from getting your Offshore exposure with the IRS behind you. As there are many options to deal with the debt, and with the help of a creative, ethical tax help, a plan you can live with is not just possible, but likely.