“QUIET DISCLOSURE” AND OTHER OPTIONS FOR TAX DELINQUENTS
In our previous blogs in this series, we discussed the two main ways U.S. expats can address their tax delinquency in the U.S. We discussed using the Streamlined procedure (assuming you qualify) as well as filing via the traditional Offshore Voluntary Disclosure Program (OVDP).
In this blog, I will be discussing several other approaches which I have seen used by some expats and practitioners and I will highlight the risks associated with each one.
“QUIET DISCLOSURE”
Some practitioners and taxpayers have favored an approach known as quiet disclosure. Under this approach, individuals will generally submit their delinquent returns and FBARs without utilizing either of the voluntary disclosure programs offered by the IRS, and will mail in their late returns and FBARs to their regular IRS service center (i.e., “under the radar”). The taxpayer would submit the returns with any tax and interest owed and hope that the IRS never comes knocking on the door asking for the penalties. Some practitioners will even attach a “reasonable cause” letter explaining why the returns were late. In my experience, such letters are generally discarded by the agent processing the return since they have no idea what to do with it.
Whether or not this approach works is still a mystery to most practitioners. This doesn’t mean, though, that you won’t read or hear about the heroics of those who took this approach and never heard a word from the IRS. Hearing these stories, by no means, should be translated as a stamp of approval by the IRS. Keep in mind that the IRS gets millions of returns every year and it can take some time for them to get to yours. At this point, the only thing working in your favor is time, since the statute of limitations on your tax returns is three years from the date it was filed.
In fact, the IRS has stated very clearly on numerous occasions that it does not like quiet disclosures given that they have two programs designed specifically to assist delinquent taxpayers. In the list of FAQs on the IRS website related to the offshore voluntary disclosure programs (FAQ 15), the IRS states:
“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 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.”
In addition, in the Government Accountability Office’s report from March 2013, the GAO strongly criticized the IRS’ failure to identify quiet disclosures and recommended that the IRS implement substantial measures that will allow it to quickly identify and deal with such disclosures. All of the GAO’s recommendations were accepted by the IRS.
Furthermore, since July 1, 2013, the Treasury is no longer accepting paper-filed FBARs. From now on, all FBARs must be filed electronically using the BSA E-filing System. As a result, there are two things you should consider before going forward with a quiet disclosure: (1) now that everything is being filed electronically, how difficult will it be for them to identify the “new” FBARs in the system? and (2) the electronic filing system does not allow you to attach a letter of reasonable cause explaining why your FBARs are late to begin with (not that such a letter is needed but many people using the quiet disclosure approach tend to attach one). To me, it sounds like the risk of getting spotted and hit with penalties has just increased significantly, and keep in mind that the FBAR penalties are usually higher.
Accordingly, it is important that you fully understand the risks involved with the quiet disclosure approach before going forward with it. Overall, if you ask me, a quiet disclosure approach is a risky proposition especially since you’re essentially doing something the IRS has asked you not to do. Does it mean it can never work? No. There may be some cases where this approach may be appropriate. But it is absolutely essential that you very carefully discuss this option with your advisor in order to fully understand your risks before you decide to move forward with it.
PROSPECTIVE APPROACH
Under this approach, taxpayers will not even bother filing their past due returns and FBARs and will simply take a “going forward” approach. Meaning, they will start filing from this year and onward and will not utilize either of the offshore voluntary disclosure programs.
In my opinion, this is even riskier than the quiet disclosure approach. First, you’re continuing to ignore the IRS’ recommendations and second, you’re leaving your prior years still open since the statute of limitation will not begin to run until you file those returns.
DO NOTHING APPROACH
Some expats choose to ignore the situation altogether and do nothing. Not smart. If you haven’t heard of it yet, you’re likely to very soon encounter another U.S. reporting requirement known as Foreign Account Tax Compliance Act (FATCA). In a nutshell, under FATCA, starting in 2014 foreign banks will be required to report accounts owned by US citizens directly to the IRS. It is true that there are many fine details and aspects to this law that I am not going to discuss at the moment which can impact whether or not the IRS will get hold of your information. But overall, the era of keeping the IRS in the dark with respect to funds in your foreign bank accounts is over.
In closing, over the past three blogs we’ve covered the various options for becoming fully compliant that are available for delinquent U.S. expats. In this respect, it is important to emphasize that there is no “one size fits all” solution to this problem and that each individual’s unique circumstances should dictate the approach chosen for him or her. Accordingly, it is critical that the professional you choose to work with, gives you the time and attention needed to fully understand your case so that he or she can assemble an approach most suitable to your situation.
At Expat Tax Professionals, our staff consists of both attorneys and CPAs who have extensive experience with these matters. We are available to discuss your unique situation in order to help you find the appropriate solution for your case.
