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Quiet Disclosure IRS vs. Streamlined Disclosure (2017-2018 Review)

Quiet Disclosure IRS vs. Streamlined Disclosure (2017-2018 Review) by Golding & Golding, A PLC

Quiet Disclosure IRS vs. Streamlined Disclosure (2017-2018 Review) by Golding & Golding, A PLC

Quiet Disclosure IRS vs. Streamlined Disclosure: Over the years, we have helped numerous clients with getting out from under a previously submitted Quiet Disclosure. Usually, a person submits a Quiet Disclosure because they are either scared, or received bad Attorney or CPA Advice.

Quiet Disclosure vs. Streamlined Offshore 

Quiet Disclosure vs. Streamlined is the difference between making an illegal offshore voluntary disclosure to the IRS (Quiet) vs. following proper IRS Offshore Amnesty Procedures (Streamlined, OVDP or Reasonable Cause).

What is a Quiet Disclosure?

 A Quiet Disclosure is illegal. An IRS Quiet Disclosure is also known as:
  • 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 going OVDP or Streamlined
  • You file prior year Income Tax Returns and FBARs
  • But You did not submit under OVDP, 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.

In other words. 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.

Quiet Disclosure vs. Streamlined 

What are the risks?

Quiet Disclosure

Making a Quiet Disclosure to the IRS in an attempt to “sneak amend” your tax returns and submit previously unreported FBAR (aka FinCEN 114) and/or FATCA Form 8938s, 3520s, 5471s, or 8621 Forms is a big mistake.

Quiet Disclosures are illegal and may result in you being subject to extremely high fines and penalties, as well as a criminal investigation.

**Click the following link to Read an in-depth Case Study Golding & Golding Prepared on Quiet Disclosure (“From Quiet Disclosure to IRS Audit…to Jail”)

Streamlined Program

The Streamlined Program is a legal means for voluntarily getting into IRS compliance with a reduced 5% penalty, or even penalty waiver if you qualify for the Streamlined Foreign Offshore Procedures.

                  

Streamlined Domestic Offshore Procedures

In order to qualify for Streamlined Domestic Offshore Procedures, you must meet two major requirements:

  • Qualify as Non-Willful; and
  • Filed all necessary prior year tax returns, timely.

Streamlined Foreign Offshore Procedures

In order to qualify for Streamlined Foreign Offshore Procedures, you must meet three major requirements:

  • Qualify as Non-Willful
  • Meet the 330-Day Foreign Residence Test/Non U.S. Person; and
  • You do not have to have filed all prior year tax returns.

**With Streamlined Foreign, there is an automatic penalty waiver.

Streamlined Domestic Penalty Calculation

While nobody wants to pay a 5% penalty, if you are caught in a Quiet Disclosure, you could be subject to a 100% penalty.

1st: Compile the 12/31 balances on your Foreign Accounts, Insurance Policies and other 8938/FBAR qualified accounts for each year within the compliance period;

2nd: Determine the proper exchange rate for each year (For example: You cannot use the current exchange rate in 2017, for your 2013 accounts — sorry for those of you with accounts in Euros, Pounds or Rupees).

3rd: Total the 12/31 balances on your previously unreported Foreign Accounts, Insurance Policies and other 8938/FBAR qualified accounts (Value of Real Estate is not included for the Streamlined Program).

4th: Pick the Year that has the highest 12/31 balance (not highest max year balance, which is the standard for OVDP).

5th: Multiply the above-value by 5%

Example: Michael’s highest year 12/31 aggregate balance in the six (6) year compliance period is 2013. In 2013 his 12/31 balances totaled $2,600,000. His penalty would be $130,000.

**If you do not qualify for Streamlined Foreign, but still want to try to avoid the IRS Penalties, you may also consider Reasonable Cause, although Reasonable Cause is not proper for everybody — and should be decided on a case by case basis.

Streamlined Program – Common Examples

If you were completely non-willful in your failure to disclosure and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd. Here are three examples in which paying any penalty for your undisclosed foreign accounts may seem unfair.

Example 1: 80-year-old Michael travels worldwide and has 3 accounts in different countries. He only uses the foreign money when he is in the foreign country at issue, he never transfers the money to the US, and there is usually a relatively small amounts of money in each account. The only issue for Michael was that at one point, Michael thought about purchasing a home overseas and left the money in the foreign account for a significant period of time (including 12/31). Foreign taxes were fully paid on the money deposited into the account and foreign taxes were paid on the income the account generated. His only mistake was that he did not report the account and/or the foreign income on his U.S. Tax Return.

Example 2: Michelle, a widow who had never been in trouble with the law, moved to the United States over 30 years ago but has a $1 million USD foreign pension from a private employer through the early 1970s. She has never accessed the account nor has she contributed (or anyone else contributed) since arriving in the United States. The account/earnings are not taxed in the US until distributed, there have been no distributions, and Michelle never reported the account on an FBAR or 8938.

Example 3: David has a foreign account, which he received as an inheritance. He never touched the money, and even though the account earns minimal annual income, there is no tax for passive income in this particular country. He has no other ties to the country and has not used any of the money. David’s son has special needs and he needs to access a large chunk of the money in a short period of time. He has not reported the account on an FBAR or 8938.

In any of the above-referenced scenarios, a penalty may seem unwarranted. If you fall into one of these categories and want to avoid the penalty, you may consider submitting a Reasonable Cause Exception Statement, which is not the same as Quiet Disclosure.

What Forms Must be Reported?

The following is a list of common forms which many people were never aware they had to report, but which the failure to report may lead to extensive fines and penalties:

Reporting Foreign Accounts (FBAR)

The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FBAR Form and report all of the accounts.

It does not matter if the money is all in one account, or in 15 different accounts. It also does not matter if the majority of the money is in one account, with minimal amounts of money in the remaining accounts – rather, once you meet the threshold requirements, you have to report all the accounts.

Penalty: 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.

Golding & Golding Resources: FBAR FAQFBAR Penalties

FATCA Form (8938)

FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.

Penalty: 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.

Golding & Golding ResourcesForm 8938 FAQForm 8938 Penalties

Foreign Gift Form (3520)

If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have the file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).

Penalty: 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.

Golding & Golding ResourcesForm 3520 Penalties

Foreign Corporation or Foreign Partnership (5471 or 8865)

The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return

Penalty: 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.

Golding & Golding ResourcesForm 5471 Penalties

Passive Foreign Investment Company (PFIC)

One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.

As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules)

Penalty: The Penalties for not filing an 8621 run concurrent with the 8938 penalties (see above).

Golding & Golding Resources: Form 8621 PenaltiesPFIC Form 8621 Excess Distribution Calculation

Foreign Trust (3520-A)

A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you and placed $5 million in trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.

Penalty: 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.

Golding & Golding ResourcesForm 3520-A Foreign Trust Penalties 

Foreign Real Estate Income

Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.

A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.

PenaltyVaries, depending on the Nature and Extent of the non-disclosure.

Golding & Golding ResourcesForeign Real Estate Income FAQ

There may be Hope

Even if you submitted a Quiet Disclosure, you may still be able to safely get into compliance before it is too late.

Golding & Golding limits their entire Tax Law practice to IRS Offshore Voluntary Disclosure:

  • OVDP
  • Streamlined Program
  • Reasonable Cause
  • FBAR Penalty Mitigation
  • FATCA Reporting

At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.

Use Experienced Counsel

**Tax Law is a specialized area of law, and Offshore Disclosure is especially complex. Your OVDP or Streamlined Attorney should have:

  • At least 15 years of experience as a practicing lawyer
  • An advanced Master’s of Tax Law Degree (LL.M.); and
  • Either a CPA or Enrolled Agent (EA) license.

You will find nearly all highly experienced tax lawyers in this particular area of law will have these credentials.

While a sole Attorney practitioner may offer a reduced rate, if they are not handling the tax preparation as well as the legal portion of the representation (including signing their own name) to the Tax Return and Legal Submission, then you have to wonder who is going to be handling that portion of the submission? 

With so much at stake, it’s just not worth the risk.