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Offshore amnesty offers, part 2: pre-clearance and opt-out

In part one of this post, we drew a contrast between participating in an IRS partial amnesty program for previously undisclosed offshore accounts and engaging in "quiet disclosure." Quiet disclosure, as we explained, involves filing amended tax returns on foreign income, as well as paying back taxes and interest. There is no guarantee, however, that quiet disclosure will go undetected in an IRS audit.

But even if a taxpayer elects to enter the Offshore Voluntary Disclosure Program (OVDP), there is still the possibility of "opting out." In this post, we will discuss that particular procedure.

In addition, in order to put "opting out" in context, we will also explain some of the basics of an OVDP procedure known as "pre-clearance."

Because taxpayers with undisclosed foreign accounts face the potential of criminal charges, approaching the IRS about the OVDP has to be handled with care. For a taxpayer who in good faith is essentially "outing" himself or herself to the IRS, there have to be some preliminary assurances that he or she will not face the full force of the agency's possible criminal hammer.

This is where pre-clearance comes in. Pre-clearance is a process by which someone applying for participation in the OVDP essentially tests the waters. If the IRS's Criminal Investigation (CI) department provides appropriate clearance, a taxpayer can feel more confident about making the required disclosures.

To be sure, a taxpayer's continued cooperation with the IRS is necessary in order to avoid possible criminal charges. And there are still stiff tax penalties to be paid. But pre-clearance provides a way to scope the program out, to make as certain as possible that the IRS will not bring criminal charges.

Even when a taxpayer has entered the program, however, there is still a possibility of opting out of it. A taxpayer might do this if the proposed tax penalty under the partial-amnesty program seems excessive. Indeed, several hundred taxpayers have done this in the last few years.

Admittedly, though, opt-out does put the possibility of criminal charges back on the table. Though there have apparently been no prosecutions of such cases yet, it remains conceivable.

Source: Forbes, "Should You Opt Out Of IRS Offshore Amnesty?" Robert W. Wood, Oct. 4, 2013

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