Quiet Disclosure Penalty

Quiet Disclosure Penalty

Quiet Disclosure Penalty

IRS Quiet Disclosure Penalty: TheIRS Quiet Disclosure Penalty for Offshore reporting penalties is complicated.  A quiet disclosure is illegal.

And, with the Internal Revenue Service aggressively enforcing foreign accounts compliance — it is important to understand the risk. If U.S. Persons submit prior years’ tax returns, FBAR or other international information reporting forms and get caught, they may be subject to tax fraud  penalties, along with willful FBAR penalties.

A quiet disclosure may also result in an IRS Special Agent Investigation.

If you submitted a quiet disclosure already, you may be able to use voluntary disclosure (aka Tax Amnesty) to reduce or eliminate penalties.

Case Study Example

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.

Scott Conducted A Lot of Research

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)

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).

He Considered 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:

  • Post-OVDP (VDP)
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • Reasonable Cause Statement

After researching the programs, Scott came to the following conclusion:

  • Post-OVDP – Penalty is too high
  • Streamlined Domestic – No protection against future audit
  • Streamlined Foreign – He does Not qualify as a Foreign Resident
  • Reasonable Cause – May result in other penalties.

Make a Quiet Disclosure or Use the Streamlined Procedures

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.

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.

Scott Receives a 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.

Scott Decides Against 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.

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.

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.

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.

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.

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.

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.

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. 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.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel

Generally, experienced attorneys in this field will have all the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.