Wednesday, November 6, 2013

IRS Using Every Resource to Find Taxpayers Who Made "Quite Disclosures" of Their Offshore Accounts

We have previously written on the topic of the “Quiet Disclosure” alternative for complying with U.S. offshore reporting requirements:
  1. IRS Collected $5.5 Billion From OVDI, But According to GAO, May Be Missing Billions More? 

  2. Quite Disclosure" Caught - DOJ Files To Collect 50% FBAR Penalty!

Under this alternative, late filing taxpayers will not participate in the Offshore Voluntary Disclosure Program (OVDP). Instead, they will simply file the delinquent returns and reporting forms late, i.e. “Quiet Disclosure,” and hope that the IRS does not pick up on them for audit or penalty purposes.

A key benefit of the OVDI program is the substantial mitigation of criminal tax prosecution. Those that proceed with a quiet disclosure do not obtain this benefit. (See Quite Disclosure" Caught - DOJ Files To Collect 50% FBAR Penalty!)

The IRS has addressed “Quiet Disclosures” in their 2012 OVDP FAQ's #15 &16:

15.What if the taxpayer has already filed amended returns reporting the additional unreported offshore income, without making a voluntary disclosure (i.e. quiet disclosure)?The IRS is aware that some taxpayers have attempted so-called “quiet” disclosures by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS. Taxpayers who have already made “quiet” disclosures are eligible to take advantage of the penalty framework applicable to this program by submitting an application, along with copies of their previously filed returns (original and amended) to the IRS’s Voluntary Disclosure Coordinator (see FAQ 24).
Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.
16.Some taxpayers have made quiet disclosures by filing amended returns. Will the IRS audit these taxpayers? If so, will they be eligible for the 27.5 percent offshore penalty? Is the IRS really going to prosecute someone who filed an amended return and correctly reported all their income?The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM, the IRS may recommend criminal prosecution to the Department of Justice.

Recent discussions by professionals suggest that quiet filers may be more at risk than they suppose.

For example, some practitioners have indicated that it is clear that the IRS has figured out a way to detect non-program disclosures, and that such filers may be subject to civil penalties higher than those imposed on OVDP participants. (See Jaime Arora, "IRS Auditors Taking Closer Look At 'Quiet' Disclosures Of Offshore Accounts," 2013 TNT 202-4 (October 18, 2013)).

A speaker at a recent American Law Institute conference noted the IRS is focusing its attention on taxpayers choosing to filed amended returns and foreign bank account reports for previous years.

"As a result, there may be a higher chance that
these so-called “Quiet Disclosures” of
Offshore Accounts
will be found and penalized by the IRS."

Maybe this renewed IRS effort is a result of The Government Accountability Office's (GAO) report regarding offshore tax evasion which was the topic of our post "IRS Collected $5.5 Billion From OVDI, But According to GAO, May Be Missing Billions More?"; which discusses that in the GAO's view, taxpayers are attempting to circumvent taxes, interest, and penalties by not participating in an offshore program, but instead simply amending past returns or reporting on current returns previously unreported offshore accounts, result in lost revenues and undermine the programs' effectiveness.

Whatever the reason, Tax Practitioners need to caution clients considering a "Quiet Disclosure" that the odds of being detected are significantly higher then they were just 3 years ago!


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