Foreign Account Quiet Disclosure (FBAR), A Guide for Taxpayers

FBAR Quiet Disclosure

In recent years, the Internal Revenue Service has significantly increased the enforcement of foreign accounts compliance. U.S. Taxpayers who have ownership or an interest in foreign accounts and assets are subject to various international information reporting requirements. While some taxpayers believe it is limited to just bank accounts, it is much more expansive than just your typical current account or savings account.

Taxpayers are required to report foreign accounts and assets, including:

• • • Investment Accounts

    • Pooled Fund Accounts

    • Securities

    • Pension

    • Life Insurance

    • Trusts

    • Entities

    • Real Estate

    • Foundations

When the taxpayer learns that they are out of compliance for prior year non-reporting, they find themselves in a bit of a conundrum. Oftentimes, taxpayers become very scared when they learn about the potential fines and penalties, usually due to all the unnecessary and inaccurate fear-mongering that they will find online. Instead of going back and getting into compliance using approved methods, some taxpayers try to go the quiet disclosure route, which means they either start filing forward from the current year or they go back and mass file prior unreported forms but they do not use the approved program such as the streamlined procedures or delinquency procedures and instead just submit the prior forms hoping it goes undetected by the IRS.

If taxpayers get caught in a quiet disclosure situation it may lead to significant fines and penalties. Thus, any taxpayer considering a quiet disclosure must be cognizant of the risks that they are taking when they go this route.

FBAR Quiet Disclosure

Research and Rabbit Holes

You sit alone at your computer researching Quiet Disclosure — contemplating whether you can get away with the illegal disclosure of foreign bank accounts, assets, investments, and income. 

But, as you learn more and more about FATCA and PFIC— you sink deeper into your chair.

Is a Quiet Disclosure worth it?

You read stories online about people who have successfully submitted and others who crashed and burned. You consider voluntary disclosure but don’t want to pay the penalties. Your spouse has had enough of you and has gone off to bed — but that doesn’t deter you, not one bit.

You want to get compliant but don’t want to pay IRS penalties for unreported assets, accounts, investments, and related income. The more you research, the deeper into the rabbit hole you fall.

10 Quiet or Silent Disclosure Risks

Here are 10 reasons to avoid a quiet disclosure:

Quiet Disclosure is Illegal

If you knowingly submit documents in prior years that should have been reported timely, or you just begin filing forward, that is a crime — which is not to say you’re going to be prosecuted — but the civil penalties alone can reach 100% value of the unreported accounts.

The Penalties are Major

If you get caught in a quiet disclosure, you will get hit with willful penalties. Those penalties can reach 100% maximum value of the unreported accounts. In addition, you can get hit with tax fraud, tax evasion, and many other penalties.

• • • Willful Blindness

  • • Reckless Disregard

You’ll Lose (Lots) of Sleep

The problem with the IRS is that they move slowly; molasses, slow. For example, if you were a little rambunctious kid and got caught stealing a cookie from the cookie jar, you’ll pretty much know soon enough whether you got caught — or got away with it. The IRS takes a lot longer, and if it turns out to be a civil tax fraud case, they can have unlimited time to enforce, while your Grandma gives you a stern warning (and a hug).

You’ll be Looking Over Your Shoulder (A Lot)

Because, when the IRS agents first introduce themselves to you, it will not be pleasant, and generally it will come as a surprise. We have worked with many clients who have been surprised by the IRS, and these IRS “introductions” come in all shapes and sizes. In each situation, the client told us they had no idea they were under any investigation.

Your Foreign Assets are at Risk

The United States has entered into bilateral tax treaties with more than 50 countries and FATCA agreementswith more than 110 countries.  In other words, the IRS is working with many foreign countries to facilitate the reduction of offshore tax crime – so your foreign assets are not safe.

Your U.S. Assets are at Risk Too

When it comes time to pay the Internal Revenue Service, the IRS is able to enforce and collect against your U.S. Assets even if the penalties stem from foreign assets and accounts. 

This may include the IRS pursuing a:

• • • Lien

    • Levy

    • Seizure

    • IRS Passport Revocation

It Can Impact Your Immigration Status

Generally, if you are non-willful and you want to get into compliance, your immigration status should be safe.  But, if you get caught in a quiet disclosure, which can be criminal, then you could be subject to much harsher fines and penalties, which may impact your ability to renew or change your immigration status.

You Can’t go Back to Streamlined or Reasonable Cause

If you knowingly made a quiet disclosure, and get cold-fee later, you would have to make a voluntary disclosure under the traditional voluntary disclosure program instead of using one of the more lenient streamlined or reasonable cause options.

What if Your CPA or Accountant Gets Caught?

This is not uncommon.  Maybe your CPA or accountant finds himself or herself in trouble and wants to use your file (and other files) as leverage to try to reduce penalties against their practice. Alternatively, your CPA files might be audited by the IRS Office of Professional Responsibility (OPR), and this could put your Quiet Disclosure history and background at risk.

You May Not Even Need It

Here’s an example: Felicia is from Spain.  She has foreign accounts that are worth $1 million.  She never reported them because she never knew she had to report them. Although she lived in the United States for many years, in 2017 she traveled back to Spain to be with her mother and spent 350 days in Spain. Felicia may qualify for the Streamlined Foreign Offshore Procedures (see below), in which she can legally fix her prior mistakes — and all penalties or waived.

IRS Enforcement of Offshore Penalties

Here is a list of common Offshore Penalties that may be amplified with a quiet disclosure:

FBAR Penalties

 The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation (Whether it is per account or per FBAR is up to the Agent assigned to your case).

Form 8938 Penalties

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, etc.  The penalty is $10,000,  per return with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return. 

Form 3520 Penalties

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.  The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Form 3520-A Penalties

Information Return of Foreign Trust With a U.S. Owner.  The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

Form 5471 Penalties

Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Statute of Limitations

A quiet disclosure is not a good chess move, because you are setting yourself up for major reporting issues going forward. The problem with making a quiet disclosure is that you have committed a form of tax fraud.  This may lead to an “unlimited statute of limitations,” which means the IRS is not limited in the time they have to audit. Even if the IRS cannot prove’ fraud,’ in most international income reporting scenarios, the IRS will have at 6-years to audit you.