Choosing Between Opting Out And Applying To The Streamlined Program Or Seeking Transitional Treatment

That issue pertains to taxpayers who are currently in the OVDI/P and who want to “jump ship” for greener pastures – namely, the SDOP or SFOP .  The issue is whether such taxpayers should opt out and then apply to the streamlined program or merely apply for transitional treatment?  Which is preferable? The transitional treatment allows taxpayers who are currently participating in OVDI/P an opportunity to remain in the OVDI/P while taking advantage of the favorable penalty structure of the streamlined procedures. Therefore, a careful risk assessment must be completed before recommending “opting out” over transitional treatment.


Why should one even contemplate opting out when a transitional route already exists?  The reason is that an “opt out” has certain advantages over transitional treatment.  As a preliminary matter, it is important to recognize that even if a taxpayer is granted transitional treatment, all conditions of OVDI/P continue in full force.  Those include, but are not limited to, the following:

1. The OVDI/P disclosure period is the most recent 8 tax years for which the due date has already passed;
2. Execution of a Form 906 Closing Agreement is required; and
3. Payment of accuracy-related, failure-to-file, and/or failure-to-pay penalties, if applicable.

Unlike the taxpayer who seeks transitional treatment, the taxpayer who decides to “opt out” and then apply to the streamlined program can theoretically avoid at least two of these onerous conditions – specifically, conditions 1. and 3.  With respect to the first condition, instead of having to submit delinquent and/or amended tax returns for the past 8 years, the taxpayer need only submit delinquent and/or amended tax returns – together with the required information returns – for the most recent 3 years for which the tax return due date has passed.  Thus, the look-back period under the disclosure procedures is five years less than the look-back period under OVDI/P.
In addition, the taxpayer need only submit delinquent FBARs for the most recent 6 years for which the FBAR due date has passed, two tax years less than that required under OVDI/P.
With respect to penalties, under the disclosure procedures, the taxpayer is generally not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.[i]  To the extent that a penalty ever was asserted, the taxpayer could assert any one of a number of defenses, including reasonable cause.
If you think that the “opt out” option is the pot of gold at the end of the rainbow, you are sorely mistaken.  It comes with a number of risks, many of which are not so obvious.  This is why any taxpayer who is considering an “opt out” in lieu of transitional relief should not make a knee-jerk response until carefully assessing all of the risks.
First, acceptance to the streamlined program is not guaranteed.  One must first apply and then be accepted.  Indeed, there is a rigorous certification process in which taxpayers must certify that the failure to file tax returns, report all income, pay all tax, and submit all required information returns was the result of non-willful conduct.  Of course, it’s not impossible to envision a scenario where a taxpayer opts out of OVDI/P only to be rejected by the streamlined program.
If that parade of horribles were to play out, then the taxpayer will have sacrificed one option – which was all but guaranteed – for another that was illusory.  In that sense, all that the taxpayer succeeded in doing was snatching defeat from the jaws of victory.  In the world of undisclosed foreign bank accounts, certainty is always better than uncertainty.
Second, by opting out of OVDI/P, the taxpayer loses any and all immunity from prosecution.  Very simply, immunity from prosecution does not exist under the streamlined procedures.  Thus, a taxpayer who opts out and is accepted to the streamlined program remains vulnerable to an arsenal of criminal tax charges that could potentially be unleashed at any time if the IRS discovers badges of fraud.  It is no wonder that some tax professionals have nicknamed the streamlined program, “naked protection.”  On the other hand, a taxpayer who obtains transitional relief continues to enjoy the benefits of OVDI/P – namely, immunity from prosecution.
Third, the issue of examination.  Returns submitted under the streamlined program can be randomly selected for audit under the existing audit selection processes.  On the contrary, examinations are not conducted under the OVDI/P program (although the IRS reserves the right to conduct them).  Instead, an examiner merely certifies the accuracy and completeness of the voluntary disclosure.  Thus, the certification process is less formal than an examination.
Fourth, with an audit comes the possibility of penalties.  As discussed above, taxpayers eligible for the streamlined procedures are generally immune from the failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, and FBAR penalties.  However, there are a few exceptions.
First, any previously assessed penalties relating to the years that are selected for audit will not be abated.  Second, to the extent that the IRS determines an additional tax deficiency for a return submitted under these procedures, it can assert additional tax and penalties relating to that additional deficiency.  Third, the IRS will unleash the full panoply of civil penalties if the examination results in a determination that the original tax noncompliance was due to fraud and/or that the FBAR violation was willful.
Finally, contrary to popular belief, opting out does not mean that a taxpayer has extricated himself from oversight of Criminal Investigation’s Voluntary Disclosure Practice.  On the contrary, such taxpayers must still cooperate by providing all requested information and records and must still pay – or make arrangements to pay – the tax, interest, and penalties that are ultimately due.
To the extent that the taxpayer does not cooperate, or if after examination, issues arise that were not disclosed prior to opting out, the taxpayer will unleash the wrath of the IRS.  Indeed, the examinations division is likely to refer the case back to Criminal Investigation.
Due to how fact-sensitive this analysis is and due to the fact that a decision to opt out is irrevocable – i.e., meaning that if you wake up the next morning with buyer’s remorse it’s too late .

[i] Of course, under the streamlined domestic offshore procedures, there is a miscellaneous offshore penalty equal to 5% of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the penalty during the years in the covered tax return period and the covered FBAR period.
 http://www.deblislaw.com/should-i-stay-or-should-i-go-choosing-between-opting-out-and-applying-to-the-streamlined-program-or-seeking-transitional-treatment.html