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Quiet Disclosure Penalty (2019) – Example of How the IRS Investigates

Contents

Quiet Disclosure Penalty Example (2018), Board Certified Tax Specialist

Quiet Disclosure Penalty Example (2018), Board Certified Tax Specialist

Quiet Disclosure Penalty Example (2018), Board Certified Tax Specialist

When a person makes a “Quiet Disclosure” they are making the fateful decision to forego the IRS approved Offshore Voluntary Disclosure programs, and instead make an illegal submission by knowingly amending prior year tax returns, FBAR, FATCA Reporting, etc. without going through the proper channels. 

Quiet Disclosure Penalty – A Case Study

In other words, they are going to “Sneak Amend” or “Sneak File” IRS documents without either submitting through the Offshore Voluntary Disclosure Program, Streamlined Filing Compliance Procedures, or making a Reasonable Cause submission.

Quiet Disclosure – Typical Example

After weeks and weeks of Google searches for terms such as FBAR, FATCA, etc. you have come to the sobering conclusion that you should have been disclosing your offshore/foreign accounts to the U.S. Government and paid U.S. tax on your foreign income (even though it was not subject to tax overseas)

Unreported Foreign Accounts

You never filed an FBAR (Report of Foreign Bank and Financial Accounts) aka (FinCEN 114) and you have never reported your foreign interest, foreign dividends, or foreign capital gain on your U.S. tax return (FATCA Form 8938 and Schedule B).

You Consider the Approved Programs

You are usually a law abiding citizen, and therefore want to get into compliance property – so you review your Offshore Voluntary Disclosure Options:

But, you come to the realization (against your better judgement) that:

  • OVDP – Penalty is too high
  • Streamlined Domestic – No protection against future audit
  • Streamlined Foreign – You do not qualify as a Foreign Resident
  • Reasonable Cause – May result in other penalties.

Quiet Disclosure vs. Streamlined

For most individuals who were non-willful, the decision boils down to Quiet Disclosure vs. Streamlined. After visiting numerous websites and speaking with different attorneys you decide that you think you know better. Against your better judgment, you convince yourself that you are going to submit a Quiet Disclosure.

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.

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.

Scott could have safely avoided this result by submitting to IRS Offshore Voluntary Disclosure. 

We Can Help You Safely Get IRS Compliant

Unlike other areas of International Tax, you need a law firm that practices exclusively in the area of IRS Offshore Disclosure, and your attorney should be a Board Certified Tax Law Specialist.

We’re here to help you.

What is the Board Certified Tax Law Specialist Credential?

Once an Attorney earns the prestigious Board Certified Tax Law Specialist credential, it proves to the general public that the attorney is dedicated to tax law, and has real tax law practice experience as an Attorney.

Few tax attorneys have passed the tax speciality exam (regarded as one of the most difficult tax exams in the country) — and met the additional education, experience, and recommendation requirements necessary for certification.

Once a person becomes “Board Certified in Tax,” it shows they have met the following requirements:

  • Advanced tax education 
  • Extensive tax law experience
  • Attorney & Judge recommendations for certification

In California for example, there are 200,000 active Attorneys, with tens of thousands of Attorneys practicing in some area of tax — and only 350 Tax Attorneys have successfully earned the designation.

Less than 1% of Attorneys nationwide have earned the credential.

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

IRS Offshore Disclosure is ALL we do.

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned 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.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

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

Tax Law Specialty Firms are Best Prepared to Represent You in Specialized Tax Matters

Unless the firm has 50-100 attorneys, with a $25 million operating budget, a successful boutique tax-law firm will almost always have all of the attorneys in the firm devote the firms’s time, energy, and resources to one specific area of tax.

In other words, all the attorneys in the boutique tax firm practice the same, single area of tax law.

Some common niche areas of tax law include:

  • Tax Litigation
  • Employment Tax
  • Sales Tax
  • Offshore Voluntary Disclosure

For example, in employment tax, all tax attorneys in the firm handle employment tax related cases. In sales tax, all the tax attorneys in the firm handle sales tax. It may be “Sales Tax” in various different fields and industries — but the firm will limit the niche practice to sales tax.

The same is true for Offshore Voluntary Disclosure. If a firm handles Offshore Voluntary Disclosure, then all tax attorneys at the firm should be handling the same area of tax law.

This area of Offshore Disclosure law is constantly evolving, and becoming infinitely more complicated — including highly complex issues involving:

  • FBAR
  • FATCA
  • PFIC
  • CFC
  • International Cryptocurrency
  • J5
  • Increased Schedule B Enforcement (Paul Manafort)
  • Foreign Gifts
  • Foreign Inheritance
  • Foreign Business 
  • Foreign Trusts
  • OVDP
  • IRM
  • SDOP
  • SFOP

If a small firm has attorneys practicing 5-10 different areas of tax law (and even non-tax law related matters) – it can put your case at a severe disadvantage.

Why? Because it is impossible for these types of “general tax firms” to establish set protocols, policies and procedures sufficient to handle all the complexities and nuances for multiple different types of niche tax law areas.

At our tax specialty firm, we handle matters involving Offshore Voluntary Disclosure, and each case is led by one or more highly experienced attorneys.

This guarantees that your case gets the time and dedication it deserves.

Why Do We Care?

Because each month, like clockwork, we get calls from individuals in an utter state of panic, because the “Expert” or “Specialist” who made themselves out to be knowledgeable, has no real knowledge of Offshore Disclosure.

It turns out, the Attorney has never handled a complex Offshore Disclosure.

Oftentimes, Golding & Golding is called upon to fix these messes. Click Here to learn about some of the representative matters we have handled.

Serious Tax Matters; Serious Tax Consequences

Getting hit with an eggshell audit, reverse-eggshell audit, or IRS Special Investigation involving offshore money is serious business – it’s not like getting a traffic ticket or speeding ticket.

The ramifications of serious tax inquiries by the IRS (especially in the area of Offshore Disclosure and Compliance), can result in serious consequences such as monetary fines, penalties and even jail time.

Golding & Golding – IRS Offshore Disclosure Lawyers

We are the only attorneys worldwide that focuses exclusively in IRS Offshore Disclosure, and each and every case is led and managed by Mr. Golding and his team.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

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.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

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:

Contact Us Today; Let us Help You.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC