Taxpayers with foreign accounts are in a tight spot now. They can take advantage of the current voluntary disclosure program (as discussed Foreign Offshore Accounts: IRS Third Amnesty Program) to minimize their tax exposure and to resolve these looming and unresolved problems. However this disclosure program brings IRS scrutiny and potential civil penalties, and in the most serious situations criminal penalties. In light of these exposures, some taxpayers with interests in foreign assets have tried to sidestep these issues by employing a strategy called a “quiet disclosure.”
The quiet disclosure is implemented by simply amending a previously filed tax return to show the foreign accounts, report the income associated with the account and paying the tax with the amended return. The problem with this strategy is that the IRS has made clear that this strategy is not acceptable. The IRS clearly states in its Questions and Answers of May 6, 2009 that quiet disclosures do not satisfy reporting requirements. On June 1, 2011, IRS announced that it would be opening up examinations against such taxpayers who have employed this strategy. They have made clear from Q&A #10 of 2009 and Q&A #15 of 2011 of their disclosure programs that such taxpayers who have made quiet disclosures would be best served to come forward to take advantage of the penalty framework of the voluntary disclosure programs.
Be aware that the civil and criminal penalties for foreign bank accounting reporting (hereinafter referred to as FBAR) violations are in most cases based on the intent of the taxpayer. (For more on these reporting requirements see Foreign Bank Account Reporting.) Where a taxpayer is aware of the FBAR requirements and the disclosure programs but knowingly attempts a quiet disclosure, the IRS may argue and a judge or jury may decide that this strategy is indicative of negligent, reckless, or perhaps willful conduct.
Equally important to note is that quiet disclosures may be lacking in other ways. Although amended returns (quiet disclosures) report income, taxes, and related interest, they do not show accuracy related penalties. More importantly the amended return may not show the information required by the FBAR form (Form TD F 90-22.1) .
For taxpayers with foreign accounts they need to seek tax counsel to decide the proper course of action in this messy area. But it would seem that using the quiet disclosure strategy would only compound the problem. To take advantage of the IRS current amnesty program and to see the operative rules please read Foreign Offshore Accounts: IRS Third Amnesty Program.
Tax Practitioner Warning: For those accountants subject to SSTS No.1, Tax Return Positions the following sobering warning should be kept in mind: Tax advisors should “not take a questionable position based on the probabilities that the client’s return will not be chosen by the IRS for audit.” Additionally, the various criminal and civil penalties under the Internal Revenue Code for tax practitioners should be taken very seriously in this context. In light of these exposures, practitioners should take pause before recommending a quiet disclosure.