Why Quietly Disclosing FBAR is a Bad Idea: What’s at Risk?

An Intentional or Unintentional Quiet Disclosure, How to Resolve

Intentional vs Unintentional Quiet Disclosure 

Sometimes, an otherwise compliant taxpayer may end up making an intentional or unintentional quiet disclosure for the prior years’ disclosure of previously unreported foreign accounts, assets, or investments instead of submitting to one of the offshore disclosure programs such as the Streamline Procedures or Delinquency Procedures. Oftentimes, the reason that the taxpayer makes a quiet disclosure is because they were goaded into doing so by a CPA or other tax professional and/or were not made aware they were required to first go back to report in prior years first — before filing their current year international information reporting forms. For example:

• • • Was the Taxpayer working with a tax professional?

    • Was the Tax professional forthright with the reporting requirements?

    • Did the tax professional properly inform the taxpayer of the responsibilities of filing the prior year’s FBAR first?

Unfortunately, even in situations in which the taxpayer relied on a tax professional, they may still become subject to fines and penalties because, at the end of the day, they are the ones who signed their tax return — and thus in the eyes of the IRS they are just as responsible as the tax professional who may have prepared the return. Nevertheless, let’s look at a few common situations and how the Quiet Disclosure may be resolved.

Unintentional Quiet Disclosure

More often than not, a quiet disclosure of foreign accounts, assets, or investments is unintentional. For example, let’s say Peter is a lawful permanent resident who has been living in the United States for four years. For the first three years, he was on an H-1B visa and met the Substantial Presence Test. Last year, he became a permanent resident and recently he did some more research into his tax requirements for next year’s filing. In conducting his research, Peter learns for the first time that he was supposed to go back and file the prior years’ international returns before filing the current year’s return (which Peter filed about eight months ago). Technically, this is a quiet disclosure because Peter failed for the current year to disclose his foreign assets without first going back to the prior year, But, Peter may still be able to get into compliance using one of the amnesty programs and he should be fine. Thus, taxpayers who have not been audited by the IRS after submitting a quiet disclosure may still be able to get into compliance by submitting to one of the amnesty programs.

Intentional Quiet Disclosure

When a taxpayer submits an intentional quiet disclosure, the situation is more complicated. The first thing the taxpayer must consider is whether or not they were non-willful when they initially failed to report their foreign accounts. If they were willful then they originally were non-compliant, then they would not qualify for the Streamline Procedures or Delinquency Procedures. But, if their initial non-compliance was non-willful then it is important to do a thorough analysis of the facts and circumstances that led them to the quiet disclosure to assess if they qualify for amnesty.

Even though the taxpayer filed required disclosure there may be opportunities for them to fix the situation and they should speak with a Board-Certified Tax Law Specialist who specializes exclusively in these types of matters to get a good lay of the land before making any further representations to the IRS.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.