Foreign Account Quiet Disclosures are Dangerous (Case Study)

Quiet Disclosure of Foreign Accounts (Choose Your Own Adventure)

Quiet Disclosure of Foreign Accounts (Choose Your Own Adventure)

When a US person learns they are out of compliance for not properly reporting their foreign accounts and assets to the US government, Google may lead them to believe that they are in much worse trouble than they actually are. In reality, millions of people are out of compliance with the Internal Revenue Service for one reason or another  — and just because a person may have missed reporting their foreign accounts on international information reporting forms such as FATCA and FBAR does not mean that they have committed a criminal violation. In fact, under some versions of the offshore tax amnesty programs (such as the Streamlined Foreign Offshore Procedures) they may not even have to pay any penalty at all. How a Taxpayer reacts to learning they are non-compliance — and what action they take to get into compliance —  is crucial. Let’s take a brief look at why Taxpayers should avoid a Quiet Disclosure of Foreign Accounts.

Charlie Has Foreign Accounts He Has Not Reported

Charlie is a Lawful Permanent Resident who relocated to the United States five years ago as a green card holder spouse to a US citizen. The US citizen spouse does not have any foreign accounts. Since Charlie lived the majority of his life overseas, he has foreign accounts. Charlie has four bank accounts, a pension plan, and some mutual funds in three different Foreign Financial Institutions. Since Charlie’s spouse has never had a foreign account, she was not aware of any reporting requirement for Charlie — so when it came time to file their annual tax returns, they simply continued as normal and just added Charlie’s income to the tax return.

Charlie Speaks With a CPA

This past year, Charlie opened up his own consulting firm which gained traction early. In order to try to understand the business issues surrounding his new venture, he spoke with a CPA. During the initial consultation, the CPA had told Charlie that these accounts were actually reportable on international forms such as FBAR and FATCA – and that he may have some additional reporting for the pension funds and foreign mutual funds. Charlie asks whether he can just report going forward. The CPA says that should be no problem.

Charlie Does His Own Research and Learns About Quiet Disclosure

Charlie does some additional research that evening and learns that just filing forward would be considered a quiet disclosure since he is intentionally not remedying the prior noncompliance. Charlie does more research and learns about the different amnesty programs — and specifically the Streamlined Domestic Offshore Procedures (which is used by US Residents to report foreign accounts & assets). He realizes though that based on the total value of his unreported assets ($3,000,000) – he may be facing a $150,000 Title 26 Miscellaneous Offshore Penalty.

Charlie goes back to the CPA to discuss, and the CPA explains that while a quiet disclosure is illegal, he has never had a situation in which a taxpayer had gotten into any trouble for using the quiet disclosure method.

Choose Your Own Foreign Account Disclosure Adventure

Like in the old days, when your parents were driving you to some sort of soccer, tennis, math, or other extracurricular activity and you were left to your book (before iPads and smartphones) — this is the time you get to the point of the book where you have to make a choice as to how the story will go. 

Charlie has a few options:

Door 1: Streamlined Offshore Procedures

Presuming for purposes of this article that Charlie is non-willful, he would qualify for the Streamlined Domestic Offshore Procedures. Thus, if he chooses Door #1, then Charlie would pay the $150,000 penalty, get into compliance for three years of tax returns and six years of FBARs, and he would now be on the path to future compliance. The chance of an IRS audit is very low. Here is a link to some common examples of Streamlined (and Voluntary Disclosure filings).

Door 2: Reasonable Cause

Charlie may choose to enter Door #2 which is the Reasonable Cause alternative. In this situation, Charlie makes his case to the IRS that his noncompliance was due to reasonable cause and not willful neglect. This is a very complex submission process, beyond the scope of this initial article, other than to say that Charlie announces to the IRS that he is non-compliant and seeks a penalty waiver.

*Reasonable cause is similar to, but not the same as, delinquency procedures.

Door 3: Quiet Disclosure

Or, Charlie may choose Door #3 which is a quiet disclosure. There are two types of quiet disclosure: Charlie could either file forward starting in the current year or he can go back and file for prior years without announcing to the IRS that he’s doing so — hoping he can avoid penalties. The problem with this option is that not only is it illegal, but in recent years, the Internal Revenue Service has increased enforcement of foreign account compliance and has pursued criminal charges against taxpayers who make an intentional quiet disclosure.

How Does a Quiet Disclosure Go Badly?

Here is a simple example of the high risk of acquiring disclosure: Charlie decides to pick Door #3 and just file going forward. A few years later, he is audited for his new business due to some of the deductions that he took for his consulting business. During the audit, the agent realizes that Charlie has the foreign accounts, but also notices on Form 8938 that Charlie marked off the box it said the account was recently opened in the current year (Charlie did this to avoid any inquiry about prior non-reporting). The problem is, that Charlie forgot that when he first moved to the United States, he updated his Foreign Bank with a self-certification FATCA/CRS statement, along with a W-9 form. Thus, the Foreign Financial Institution has actually been reporting Charlie’s information to the IRS for several years. The auditor asks again during the audit whether the account was recently opened and Charlie doubles down and says that the accounts were just recently opened when he reported them.  The IRS does their due diligence, which includes speaking with the CPA; the IRS learns that Charlie had knowingly failed to report the accounts in prior years, and the case is then referred to the Special Agents for a criminal investigation.

A Quiet Disclosure is Risky

Making a quiet disclosure these days when offshore tax reporting and compliance is a key enforcement priority by the IRS, is not a good idea. Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of matters to get a good understanding of their options — because oftentimes if a taxpayer qualifies for the delinquency procedures or the Streamlined Foreign Offshore Procedures, then they may qualify for a complete penalty waiver — and all the quiet disclosure did was put them in harm’s way.

International Tax Lawyers Represent Clients Worldwide

Our International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.

Contact our firm for assistance.