At the end of the OVDP process the assigned agent sends out a closing agreement, IRS Letter 906, also called Form 906. It summarizes the Offshore FBAR-equivalent penalty being assessed and asks that the taxpayer sign off on the agreement and send payment (although a standard IRS collection alternative can be arranged in case you can't pay in full) within 30 days. In many cases the number they get is drastically different than what many taxpayers thought it would be--and they have very little time or room to address this.
"I joined the OVDP," they say, "and I did everything I was supposed to do, and at the end I got handed a bill that was more than I expected." Maybe rental property penalties inflated their penalty base exponentially. Maybe it was determined that the 5% penalty, available in certain special cases, did not apply. Maybe they had a dispute with the assigned agent over the exchange rate used, the accounts included or excluded, or any number of issues.
"I anticipated the agent would understand the situation," they say. "I thought they would follow the FAQ." We see that they do follow the FAQ, sometimes rigidly and mechanically, with no room for interpretation or common sense extrapolation. Taxpayers who ask to go up the chain of authority meet resistance. "This is how it is," they’re told. And "you don’t want to opt out," the agents caution. "You’re just going to make it worse for yourself."
Taxpayers in this position have little recourse, but must be aware of the options they can exercise. In this position, the only options are payment of the full penalty, or to opt-out.
Opting out is not a withdrawal from the program or its protections and rules— it is only an opting out of the standard 27.5% “offshore penalty” in favor of an individual examination on the facts and circumstances of your particular case. In the case of those people in the above situations, this has a lot of possibilities. They can put forward their plausible objections and be heard. The examiner will decide year by year, point by point, whether specific penalties are appropriate and in what amount.
Can you see why the agents on the cases maybe want to pressure taxpayers from pursuing this avenue? Opting-out creates a lot of work for the examiner.
Does a prosecutor want you to go to trial, or plead out?
OVDP opt-outs can move at a snail's pace. We met with examiners regarding a 2010 case just last week. There’s no question that it’s lengthy and uncertain. If you are up against a 30-day deadline and want to know your options, this is the primary answer: when you get an IRS Letter 906, your options are to pay or opt out. Pay money now or take a chance—and your odds may be very good—on relief that may take years to come.
We would love to see a system where the first agents involved have more latitude and discretion to prevent this kind of drawn-out process. If the program has to exist in its current iteration, we must work within the confines of what we know. We know that the opt-out process has been created for situations where the standard penalty is “not appropriate.”
If you have an IRS Letter 906 that’s staggering you and the standard penalty isn't appropriate and you refuse to pay — opting out is your best option. If you would like to set up a confidential, complimentary consultation to discuss your case details and decide how to move forward, contact us.