RS Quiet Disclosure (2018) - The Risks of Trying to Fool the IRS (Golding & Golding)

RS Quiet Disclosure (2018) – The Risks of Trying to Fool the IRS (Golding & Golding)

A “Quiet Disclosure” to the IRS is always a bad idea

IRS Quiet Disclosure

Why are IRS Quiet Disclosures such a bad idea? Because the U.S. Government has made offshore tax compliance an enforcement priority.

Moreover, the U.S. Government (IRS and DOJ in particular) are authorized to issue extreme fines and penalties against any taxpayer who is caught submitting a Quiet Disclosure.

Beyond monetary fines and penalties, the U.S. Government may also initiate a criminal investigation against any individual, estate or business that attempts to submit a quiet disclosure.

As such, the risks of submitting a Quiet Disclosure far outweigh the reward.

What is Offshore Voluntary Disclosure?

While Quiet Disclosure is illegal, Offshore Voluntary Disclosure is the legal process of getting your previously unreported foreign income, assets and accounts into compliance. When it comes to Offshore Disclosure, the two main programs are OVDP (Offshore Voluntary Disclosure Program) and the Streamlined Offshore Procedures (aka Streamlined Filing Compliance Procedures).

*It is not uncommon for individuals, estates, and businesses who have recently learned of international tax compliance reporting requirements such as FATCA (Foreign Account Tax Compliance Act), FBARs (Report of Foreign Bank and Financial Accounts), 8938s (Statement of Specified Foreign Financial Assets), 3520 Forms (Foreign Gifts and Trusts) etc. to get nervous about what the term “offshore disclosure” entails. Sometimes, this fear of the unknown leads them down the dark path to making a Quiet Disclosure.

A lot of the Information online is Scary…and Wrong

All you have to do is run a quick search on Google to learn (read: scare yourself) about the various fines and penalties associated with failing to file these forms.  Please keep in mind, that many of these “Tax Experts” have no idea what they are talking about, and are simply using marketing ploys, fear tactics and trumped up credentials (such as “Expert” – which is all but prohibited by the American Bar Association) to get you to part with your wallet; you must try to separate fact from fiction, even at a time when you are most vulnerable.

Your end-game is to get into compliance. The most effective way to get into compliance is to hire an experienced International Offshore Disclosure Lawyer to represent you from beginning-to-end. With the recent enforcement of FATCA (it was written into law back in 2010 but did not begin enforcement until 2014) foreign countries are actively reporting US Account Holders. As such, you should be very careful about pursuing a Quiet Disclosure.

We are providing a summary of Quiet Disclosure by way of a comprehensive Case Study, followed by a summary of the steps you can follow to get into compliance:

Quiet Disclosure – The Basics

A Quiet Disclosure/Silent Disclosure is when you “sneak amend” your prior tax returns to include previously unreported foreign accounts and foreign income. You also file FBARs for previous years without taking responsibility through an Offshore Voluntary Disclosure Program or Reasonable Cause Statement.

No matter what anybody tells you about the risks, and serious repercussions if you are caught (read: financial devastation and loss of freedom) committing these tax crimes, you are convinced that the IRS is not going to find you.

Presumably, you are making this decision because you are unfamiliar with the criminal process.

In other words:

  • You have never been in trouble with the law;
  • You have never been arrested;
  • You have never had a search warrant executed at your residence;
  • You have never been confronted by IRS Special Agents (aka Criminal Investigators);
  • You never spent time in a Holding Cell;
  • You have never been sentenced to, or spent time in jail or prison with real criminals.

Intentional Non-reporting and Non-Disclosure is Criminal

Once you learned  that you were supposed to be filing certain reports with the US government, as well as reporting your accounts on your tax return, you have knowledge of the IRS and DOT reporting/disclosure requirements.

From here forward, if you make the fateful decision to quietly disclose your information to the US government, then you are intentionally avoiding paying taxes, interest, fines and penalties. Therefore, you have committed a crime.

If you believe your quiet disclosure cannot get you investigated, arrested, and prosecuted — you are mistaken. The following is a case study of how one individual’s failure to report their foreign accounts went from IRS Audit to Search Warrant… and ultimately to arrest and prosecution.

Case Study: Scott from Hong Kong

Scott is citizen of the United States and China, and previously had permanent residency in Hong Kong. Scott works in investment banking and did a stint in Hong Kong for a few years. During his time in Hong Kong, Scott had opened up local bank accounts, which is perfectly normal as Scott was residing in Hong Kong.

Scott relocated back to the United States but never closed his foreign accounts in Hong Kong. The reason why is because after Scott learned he could earn significant interest income from this account (4% – 8% ROI), which not taxed by the Hong Kong government, Scott padded his accounts – upwards of $2M.

Scott is using the interest to purchase multiple rental properties both abroad and in the United States. It should be noted that Scott opened the account way before FATCA (foreign account tax compliance act) was put into law. Therefore, Scott was never worried about the foreign government reporting his account information to the United States.

Tax Crime – Tax Evasion and Tax Fraud

Since Scott earned significant money offshore that he has intentionally and knowingly failed to report on his tax return, he has committed textbook Tax Evasion and Tax Fraud. Moreover, since he is “cleaning” the money, if the Feds got creative, he could also be looking at Money Laundering charges as well.

Fast Forward to 2015 – FATCA Letter

Scott received a FATCA Letter from his foreign bank requesting that he certify his U.S. status. In other words, they wanted him to submit either a W-9 or W-8 BEN. When Scott opened the foreign accounts, he did so using his Chinese citizenship. As such, the Hong Kong Bank did not actually know Scott was a U.S. Citizen. Rather, the Bank sent him this certification form solely because he had a U.S. address.

Scott had done some research on FATCA and realized that several foreign countries and thousands upon thousands of foreign financial institutions would be reporting account holder information to the United States. Up until this point, Scott had not done anything necessarily wrong overseas. The mere fact that he had given the foreign bank his Chinese citizenship is not a lie (although failing to report the earnings on the U.S. Return was a lie.) It’s what he does next which is the catalyst for his future problems with the US government.

Problem 1: Not going OVDP

Scott was clearly willful in his failure to report foreign accounts and foreign income to the U.S. Government. Since Scott had not yet been contacted by the IRS (e.g., he was not under examination) he is eligible to submit to OVDP (Offshore Voluntary Disclosure Program). In accordance with OVDP, Scott would amend his returns, pay a penalty – but almost always would avoid criminal charges without the U.S. Government initiating a criminal investigation.

Golding & Golding is one of the top Tax Law Firms worldwide that limits their entire practice to Offshore Disclosure. Click Here to Learn More.

Problem 2: Denying U.S. Citizenship to the Foreign Bank

In response to the FATCA Letter, Scott decides he is not going to disclose his U.S. Citizenship Status to the Foreign Bank. Rather, he represents to the foreign bank that he is not a US citizen. Scott believes if he is caught by the United States he will simply hop on a plane and travel overseas using his Chinese passport, but does not realize that the US can issue customs holds on US citizens and Permanent Residents to prevent them from traveling internationally.

Problem 3: The Foreign Bank Reports him to the IRS

When the Hong Kong bank is reconciling their accounts, they realize that they actually have a U.S. Social Security number for Scott. Scott did not realize but at some point during his relationship with the bank, he considered purchasing a home in Hong Kong and was also considering taking a loan from the bank. This is more than 10 years ago, but at that time he provided his US information to the foreign bank.

The foreign bank reports the information to the IRS.

Problem 4: Scott Performs a Quiet Disclosure

Before Scott is contacted by the U.S. government, he believes the foreign bank accepted his certification that he is not a U.S. Citizen or Legal Permanent Resident (Green Card Holder) and the U.S. none the wiser. As such, Scott fatefully submits his quiet disclosure.

Scott files prior year tax returns to report previously unreported interest income. He also files past-due FBARs to report undisclosed foreign accounts — but does not elaborate at all in his submission as to why the reports were late, and does not submit via OVDP.

*Since Scott was Willful, he is ineligible for the Streamlined Offshore Disclosure Program alternative.

Problem 5: Scott is Audited by the IRS

Unbeknownst to Scott, the Internal Revenue Service had received the information from the foreign bank. Moreover, the IRS also realized that Scott has amended his last three tax returns, but did not do so in accordance with proper IRS policies and procedures (aka OVDP or Streamlined Offshore Procedures). Scott received a Notice of Audit by the IRS but before Scott received any notice that his amended returns and FBARs are processed.

During the audit, Scott is self-represented, because Scott is a little too smart for his own good. Scott notices that the tax returns the auditor brings with him are the original returns and not be amended returns. When asked if he ever amended his return (Standard Question during and audit) – Scott gets nervous, and says…no.

What Scott does not realize is that the auditor is already aware that Scott has foreign accounts. He knows this, because the foreign bank reported Scott to the IRS, which is what led Scott’s Tax Returns being investigated in the first place.

The IRS Agent does not directly ask Scott about the foreign accounts and does not reference the fact that he knows amended returns were filed quietly. Rather, he asks Scott roundabout questions in which Scott answers make it clear that he does not have foreign accounts and that he had no idea that there was any reporting requirement. At this time, the audit ends and Scott believes that everything is fine.

Problem 6: Scott Lied to the IRS Agent

Making intentional misrepresentations (or omissions) to the Internal Revenue Service is a crime, which may result in criminal penalties and prison. The Internal Revenue Service takes these matters very seriously and since Scott made intentional misrepresentations to the auditor regarding his foreign accounts, the auditor refers the matter to the IRS Special Agent division for Criminal Investigation.

Problem 7: A Criminal Investigation is Launched

The Special Agents of the Internal Revenue Service begin a criminal investigation. They investigate his bank, financial records, bank accounts, etc. The IRS quickly learns that Scott has been moving more and more money offshore intermittently over the last few months. They also realize that Scott purchased a plane ticket to fly to Vietnam. The IRS is concerned that Scott is going to leave the country and knows he can travel internationally by using his Chinese passport.

As a result, the special agents obtain a search warrant and descend upon his home early the next morning. Scott does not want to allow them to enter his home, but since the agents are armed with a search warrant, Scott must let them enter and search the home in accordance with the parameters of the warrant. The special agencies seize Scott’s computers, telephones, and passport.

Problem 8: A Grand Jury Indicts Scott for Tax Fraud

Due to the fact that Scott made intentionally false representations to the IRS, as well as the fact that he intentionally lied on his tax returns, it was not difficult to convince a grand jury to indict Scott on tax fraud. Scott will now have to defend himself against the IRS, which has a nearly perfect conviction rate when it comes to tax matters (they only pick the cases they know they can win)

Scott Could have Fixed this Problem

Scott had several opportunities along the way to resolve the tax issue without the government filing criminal charges. Sometimes, it is better to simply hire an experienced international tax lawyer from the start to assess your tax situation, and put you in the best position to resolve your tax issues without fear of criminal prosecution.

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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.

A Penalty for failing to file Form 3520

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.

A Penalty for failing to file Form 3520-A

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.

A Penalty for failing to file Form 5471

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.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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