If one were to thoroughly review the available information detailing the options that are available to United States (US) taxpayers with undisclosed foreign financial accounts over $10,000, the results would be the offshore voluntary disclosure program, the streamlined filing compliance procedure, the delinquent FBAR or informational report procedure(s), and quiet disclosure. The practice of quiet disclosure usually will come with a bold all caps statement indicating that the tax practitioner or person writing the article does not recommend this practice and it could lead to severe penalties and criminal liability. But when asked why this is the case or for the basis on which these assertions are made, most practitioners cannot pinpoint exact reasoning. Here is a quick, easy breakdown of why the practice of quiet disclosures are strongly discouraged by practitioners and the IRS.
To frame this issue, it is crucial to understand why the IRS uses voluntary disclosure programs. Voluntary disclosure programs are used to bring groups or classes of non-compliant taxpayers into compliance by their own accord, rather than have the IRS exercise a massive and costly operation of audit and enforcement. The IRS heavily guards the integrity of their voluntary disclosure programs because they are effective for compliance and very inexpensive to implement.
Thus, the IRS has several policy-based reasons behind their adverse position to quiet disclosure.
First, the practice of quiet disclosure undermines the incentive for taxpayers to participate in the voluntary disclosure program or qualified alternatives the IRS is offering to bring about compliance. In essence, the quiet disclosure practice defeats the purpose behind the voluntary disclosure program entirely.
Second, if taxpayers are able to come into compliance using the quiet disclosure process, there is no deterrence for those taxpayers to correct future behavior. Taxpayers may try to use new and innovative offshore, bank secrecy or tax concealment techniques with the fail-safe of quiet disclosure.
Third, this practice discourages those taxpayers that have sought the protections of the voluntary disclosure program and had to pay much more than those that have gone the route of the quiet disclosure. The IRS must make sure to treat taxpayers with consistency.
Fourth, there is a significant amount of lost revenue for the United States Government when taxpayers use quiet disclosure.
Finally, the quiet disclosure process reduces the ability of the IRS to track information helpful to understanding the internal culture of tax haven countries, the operations and tactics of banks of that market tax evasion products and services, and the facilitators or promoters that illicit the schemes.
As of 2013, Government Accountability Office estimates that there are 10,595 quiet disclosures. Through statistics of income (SOI), the GAO was able to track an imbalance by comparing the rise of Schedule B filings that indicate a foreign account and FBAR reports filed between 2003 and 2010.
This covers the exact period of the Offshore Voluntary Disclosure Program for 2009 with 19,337 participants. It is plainly obvious that the doubling effect illustrated above is not the 2009 OVDP and cannot fully be attributed to new foreign bank accounts. The conclusion here is that quiet disclosure has to play some role in this statistical doubling effect.
It should be noted that there is methodology in place for the IRS to conduct “stealth audits” of the quiet disclosures that have already been made. The first evolution of this methodology started with examining the amended 1040 tax returns filed between 2003 and 2008 and then filtering the returns to remove non-offshore items. The second iteration involved the same time period and compared FBAR reports filed by taxpayers indicating non tax haven jurisdictions versus those indicating tax haven jurisdictions. The third and current iteration incorporates both very effectively. An examination of both amended returns and the FBAR reports in conjunction, while excluding those taxpayers in OVDP.
This third iteration incorporates four of the largest databases of taxpayer filing information as follows:
- The Criminal Investigation Management Information System (CIMIS)
- The Currency and Bank Retrieval System
- Individual Master File and Business Master File
- Compliance Data Warehouse (CDW)
These databases connect data sharing between the IRS Compliance division, Financial Crimes Enforcement Network and IRS Criminal Investigations (CI) division. The information shared is as follows:
- Enforcement Revenue Information
- Individual Transactions Files
- Audit Information Management System Files
- Individual and Business Returns Transaction Files
Furthermore, the Offshore Compliance Initiative office has asked IRS’s Planning, Analysis, Inventory and Research (PAIR) office to determine whether taxpayers who reported their offshore income properly, but had not filed FBARs, recently started filing delinquent FBARs.
In summary, the IRS discourages the practice of quiet disclosures as it is a direct affront to the voluntary disclosure program policy and goals that help the IRS foster compliance through an inexpensive and effective process. The IRS is currently using methodology to identify and pursue past quiet disclosures and new efforts to curb compliance through one of the established offshore programs or selected alternatives (streamlined filing, etc.).
Finally, with the implementation of FATCA, the IRS will have access to more real time data and information reporting to which it currently does not have access. Taxpayers with either undisclosed foreign financial accounts or accounts that have been disclosed through quiet disclosure should seek the assistance of an attorney to determine the scope and breadth of potential civil and criminal liability. Once the scope is determined, the accurate path to proper compliance can be achieved.
About Five Stone Tax Advisers
Five Stone Tax Advisers has years of experience negotiating directly with the IRS to get the best possible outcome for you. Our International Tax Advisory and Compliance unit has a team of tax attorneys, certified public accountants and enrolled agents that form a single sourced point of contact that will provide services for all the legal, compliance and financial reconstruction aspects of these cases.