- 1 IRS Voluntary Disclosure vs. Quiet Disclosure
- 2 Quiet Disclosure
- 3 What is a Quiet Disclosure?
- 4 Anatomy of a Typical Quiet Disclosure
- 5 The Problem: Now You Are Willful
- 6 IRS Voluntary Disclosure (IRM)
- 7 IRS (IRM) Voluntary Disclosure Practice
- 8 What Must Be Included in the Letter?
- 9 The Submission Must be Timely
- 10 What Type of Letter is Submitted?
- 11 What are Disqualifying Factors?
- 12 How Does the IRS Evaluate the Disclosure?
- 13 What if You Don’t Make the Cut?
- 14 Making an IRS Voluntary Disclosure – Use an Attorney
- 15 Golding & Golding, Board-Certified Tax Law Specialist Team
IRS (IRM) Voluntary Disclosure (2018) vs. IRS Quiet Disclosure
When a person submits to the traditional IRS Voluntary Disclosure Program, they are making a representation to the IRS that they know they made a mistake, and that mistake may have been willful, intentional, and/or with reckless disregard.
- Is a Voluntary Disclosure Safe?
- Do I have to report everything to the IRS?
- Will I still pay penalties?
- Can’t I just voluntarily disclose?
- How will the IRS ever find me?
- Can I go to jail?
IRS Voluntary Disclosure vs. Quiet Disclosure
By making an IRS Voluntary Disclosure, the person would like to try to get into compliance while avoiding any serious repercussions (which can range from hundreds of thousands, or even millions of dollars in penalties, and criminal prosecution).
There are specific procedures that a person follows in order to submit to the voluntary disclosure program, and their detailed below.
A Quiet Disclosure is something different entirely. Typically, a Quiet Disclosure occurs when a person goes backtracks and mass files files prior year informational returns, tax returns, and/or FBAR Statements without following the proper protocol.
Alternatively, the person may begin working to get into compliance “going forward,” without doing anything to remedy the past mistakes.
Let’s compare the two options:
What is a Quiet Disclosure?
- Silent Disclosure
- Soft Disclosure
- Illegal Offshore Disclosure
- Criminal Tax Disclosure
Anatomy of a Typical Quiet Disclosure
- You have unreported foreign accounts, assets or income
- You learn about IRS Offshore Reporting Requirements
- You learn about FBAR & FATCA Penalties
- You get caught up reading fear mongering websites
- You take the FBAR & FATCA penalties “out-of-context”
- You get scared about submitting to IRS Voluntary Disclosure or Streamlined
- You file prior year Income Tax Returns and FBARs
- But You did not submit under IRS Voluntary Disclosure, Streamlined or Reasonable Cause
- Now you are scared of Willfulness, Criminal Penalties & a potential Jail Sentence
The Problem: Now You Are Willful
Even if you did not have a prior knowledge of the reporting requirement at the time you hadn’t disclosed, by submitting a Quiet Disclosure, when you know you were required to submit under either OVDP, Streamlined or Reasonable Cause you have now made yourself willful — since you have willfully failed to pay the penalty, you may have bootstrapped your non-willful submission into full-blown tax fraud and tax evasion.
Why? Because you have now willfully evaded reporting foreign accounts and/or paying outstanding U.S. Tax, Interest and Penalties by knowingly filing an untimely FBAR or Amended Tax Return without following proper procedures.
IRS Voluntary Disclosure (IRM)
The traditional IRS Voluntary Disclosure Program has been on the books for many years. It can be found in the IRM (Internal Revenue Manual)
Once OVDP was introduced, individuals and businesses with foreign income (along with possible U.S. unreported income) typically preferred OVDP to the IRM Voluntary Disclosure.
Why? Because the procedures were more transparent, the penalty structure more secure, and it had a near guarantee of avoiding a criminal investigation or audit.
So while for some people the penalty amount for OVDP was severe, when the penalty amount was offset against the potential penalties for tax fraud and tax evasion (along with willful FBAR penalties and a possible jail sentence) – the penalties were not so bad.
IRS (IRM) Voluntary Disclosure Practice
Let’s focus on how the non-OVDP IRS Voluntary Disclosure Practice (program) works:
What Must Be Included in the Letter?
Instead of providing exact instructions, the IRS provides guidelines and examples. Here, the Guidelines for voluntary disclosure provide that the IRS requires that a taxpayer include the following in their disclosure:
Willingness to Cooperate
A taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability.
The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
The Submission Must be Timely
In order for an IRM Voluntary Disclosure submission to be timely, it must be:
Not Under Personal IRS Examination
The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation.
Hopefully, Nobody Snitched on You
The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance.
No Directly Related IRS Examination
The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.
No Criminal Action Initiated
The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).
What Type of Letter is Submitted?
Unlike the pre-clearance letter in the traditional OVDP, there is no set introductory letter that is submitted for the IRM program. Rather, the Internal Revenue Manual provides examples of what a proper disclosure may consistent of.
Here are examples examples provided by the IRS:
Example 1 (Attorney Letter and Amended Returns)
A letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above.
Example 2 (Barter Exchange)
A disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges but before it has commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so. In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
Example 3 (Tax Scheme, IRS Compliance Project)
A disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme that is the subject of an IRS civil compliance project. Although the IRS already obtained information which might lead to an examination of the taxpayer, it not yet commenced any such examination or investigation or notified the taxpayer of its intent to do so. In addition, the taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.
Example 4 (Unfiled Returns, IRS Notice)
A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year. The individual files complete and accurate returns and makes arrangements with the IRS to pay, in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all of the elements set forth in (3), above have been met.
What are Disqualifying Factors?
The IRS has listed various factors that will disqualify a person from successfully making an IRS Voluntary Disclosure. These factors include:
If a taxpayer expresses an interest in making a voluntary disclosure, he/she must be asked the following questions to determine if potential disqualifying factors exist:
- Are you currently the subject of a criminal investigation or civil examination? (If yes, specify)
- Has the IRS notified you that it intends to commence an examination or investigation? (If yes, specify)
- Are you under investigation by any law enforcement agency? (If yes, specify)
- Is the source of any of your income from illegal activity?
- Do you have any reason to believe that the IRS has obtained information concerning your tax liability? (If yes, specify.)
*If the taxpayer responds yes to any of the above questions, the facts and circumstances of each investigation must be clarified to determine if it is a disqualifying factor.
How Does the IRS Evaluate the Disclosure?
As with most issues that have a criminal aspect to it, it is typically the IRS Special Agents who will evaluate the submission.
As provided by the IRS:
– Special agents will evaluate disclosures to determine if the information provided is truthful and complete, and shall make a recommendation to the SAC, as to whether or not the taxpayer has met all voluntary disclosure practice criteria.
– The evaluation should be completed as expeditiously as possible, ideally within 10 working days or less from the date the complete voluntary disclosure communication from the taxpayer has been received. The SAC should be apprised if an evaluation cannot be completed within 30 days.
As part of the evaluation process special agents will query the following databases:
- The Criminal Investigation Management Information System (CIMIS)
- Integrated Data Retrieval System (IDRS)
- The Currency and Banking Retrieval System (CBRS) Database
- The National Crime Information Center Database (NCIC)
– The special agent needs to query all applicable databases during the evaluation process of the voluntary disclosure matter including a national query for criminal investigations within the CIMIS database as noted above.
– If the indices checks (or any other evaluative steps) disclose potentially disqualifying information the taxpayer should be contacted and offered an opportunity to provide an explanation.
– If a satisfactory explanation cannot be provided, this may constitute a disqualifying factor.
– If the indices checks disclose no disqualifying information, the voluntary disclosure will be referred to the SAC, with a recommendation that the matter be forwarded to SB/SE or LB&I Offshore Identification Unit.
What if You Don’t Make the Cut?
Like with any audition or tryout, not everyone makes the team, gets the part…or is accepted into IRS Voluntary Disclosure.
As provided by the IRS:
– If the SAC determines that a disclosure does not meet all IRS voluntary disclosure criteria, a letter will be sent to the taxpayer informing them of the reason(s) he/she is ineligible to participate in the IRS’s voluntary disclosure practice. It is not necessary to cite specific reasons for the rejection if it would compromise an ongoing investigative matter.
– Criminal Investigation will evaluate the criminal potential of all negative evaluations. Therefore, the assigned special agent should initiate a PI number within CIMIS. This PI number is a separate number from the voluntary disclosure number. If the matter is not acceptable for investigation, it will be forwarded to PSP for whatever action they deem appropriate.
Making an IRS Voluntary Disclosure – Use an Attorney
The voluntary disclosure material provided by the IRS indicates that the attorney should make the submission. There is no attorney-client privilege with a CPA, which means the information you discuss with your CPA may not be confidential or protected by privilege.
Golding & Golding, Board-Certified Tax Law Specialist Team
Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.