Quiet Disclosure of Foreign Bank Accounts or Foreign Income – Golding & Golding
Like millions of U.S. Citizens, Legal Permanent Residents, and others subject to U.S. Tax by meeting the Substantial Presence Test — you just learned that you have unreported foreign accounts such as foreign Bank Accounts, Financial Accounts, Retirement Accounts, Investment Accounts, etc.
You may have also realized that you never reported your foreign passive income (Bank Account, Investment, Real Estate Rentals)
You spent the better half of your evening (and probably longer) researching various acronyms such as FBAR, FATCA, and 8938 and have worked yourself into a panic — thanks to all the fear mongering articles plastered online.
You have come to the conclusion that you are out of IRS tax compliance involving your foreign accounts, and you also failed to report your foreign passive income on your U.S. Tax Return.
Be Careful what you Read!
You read through countless blogs, and lost count of the number of Expat Forums you visited. Overall, you think the chances of the IRS or Department of Treasury finding or auditing you are are relatively slim — especially in the seemingly endless sea of non-compliant taxpayers.
As a result, you make the fateful decision to pursue a Quiet Disclosure/Silent Disclosure and submit amended tax returns and prior year FBARs without going through either of the IRS Offshore Disclosure Programs (e.g., OVDP or IRS Streamlined Program), or making a Reasonable Cause Statement submission.
Rather, you throw caution (and sound reason) to the wind and submit the documentation “below the radar” in hopes that you go undetected. While not everyone who submits a quiet disclosure/silent disclosure gets caught, for the ones who do it can be very costly endeavor — including loss of the money in the accounts through:
- Passport Revocation
- Customs Holds, and
- Possibly Your Freedom
The following is a case study of how a Quiet Disclosure or Silent Disclosure can go bad:
Case Study: Quiet Disclosure/Silent Disclosure
Scott is originally from Singapore but relocated to the United States nearly 10 years ago. Around eight (8) years ago he opened up foreign accounts in Singapore, Hong Kong and other generous tax countries which do not tax passive income.
Scott has a good job and continues to invest in foreign accounts. As a result, Scott has been able to amass a small fortune overseas. In fact, Scott earns upwards of $10,000-$20,000 a year on his foreign investments in interest money. Moreover (and not coincidentally) Scott’s foreign accounts are held in countries which do not tax passive income; therefore Scott’s foreign earnings are not required to be TDS (Tax Deducted at Source) and so Scott receives the payments tax free.
Scott is aware that he is supposed to report his accounts on an annual FBAR statements and include the income in his US tax return but simply does not want to pay US tax on these monies. From his perspective, the money is earned overseas, he is a Singaporean Citizen, and therefore the US should not be entitled to tax his foreign earnings (especially since they are not being taxed in the countries of origin)
Fast-forward to 2014 and the enforcement of FATCA (Foreign Account Tax Compliance Act). Scott receives a “FATCA Letter” from his foreign banks letting him know he needs to respond to the bank and certify under penalty of perjury that he has complied with all of his US tax filing and payment requirements. Scott does research and learns that he could qualify for OVDP (Offshore Voluntary Disclosure Program), but not the streamlined program because his actions were willful.
Scott also realizes that two of his banks are considered “bad banks” and therefore he would be subject to a 50% penalty on the foreign accounts. When the 50% penalty is coupled with past tax liability, Scott would owe nearly the full balance of the foreign accounts to the IRS.
Therefore, Scott makes the fateful decision to submit a quiet disclosure.
Scott amends three years of tax returns and submits three years of FBARs to the IRS and DOT without the protection of OVDP. Scott does not hear from the IRS for several months and believes everything is fine…until one evening when is leaving the health club and spies two individuals in suits standing by his vehicle. The two individuals introduce themselves as IRS Special Agents and ask Scott if they can speak with them.
Scott has seen enough episodes of 48 hours to know he should never speak with “the Fuzz” without counsel. Scott refuses to speak to the IRS Special Agents and says he wants to obtain an attorney. Scott is not arrested on the spot but understands he could be facing significant fines and penalties in this matter is not handled properly…not to mention several years in Federal Prison.
How did the IRS Learn of Scott’s Foreign Accounts?
Since some of Scott’s money was in bad banks, when these bad things reported the names of US taxpayer accounts to the IRS and DOT, Scott’s name popped up multiple times since he had multiple accounts in various different foreign financial institutions. When the U.S. Government cross referenced Scott’s account information with his US tax return and learned not only had he not reported the account information but also did not include the earnings in his tax return (and registered for the accounts as a Singaporean citizen and not a U.S. citizen), he quickly gained the attention of the criminal investigation unit.
International Tax Attorney
With the help of an experienced international tax lawyer Scott may be able to avoid criminal liability if he’s able to negotiate a deal with the IRS/DOJ. In addition, Scott may also be charged with a felony which could impact his ability to get a job in the future, credit, etc. — so it is very important for Scott to ask fast in trying to resolve these issues.
In the end, Scott would’ve been much better off simply entering OVDP, paying a 50% penalty and the outstanding taxes and going on with his life. The majority of the time, as long as a person in OVDP makes a “Full Disclosure” they will not be criminally prosecuted.
Golding & Golding are very experienced OVDP lawyers who have handled offshore disclosure matters for clients with upwards of $20,000,000+ dollars of unreported funds. We provided a summary below of our “OVDP FAQs from the Trenches” for your review:
We have put together a basic summary of key issues individuals have to worry about when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focusing more on the technicalities of qualifying for the program. Our summary will provide you more of the “ins and outs” of the actual application for individuals who are unsure of which accounts should be reported and how entering OVDP can impact their legal status.
In the end, if you were willful and you have foreign accounts that are unreported (especially if you are in a FATCA Agreement Country) or bank with a FFI (Foreign Financial Institution) that is reporting (and even more so if your money is in a Bad Bank), you should consider retaining an experienced OVDP lawyer and entering the program.
Can My Immigration Status Be Impacted by OVDP?
Yes, depending on your current status and future intended U.S. legal status, an OVDP application may have an impact. Under some circumstances it may hurt your status, and under other circumstances it may actually benefit your status.
Applying for Citizenship
Your immigration status can be impacted for several reasons. As a general answer, your immigration status can be impacted due to the “willfulness” presumed by applying for OVDP. When a person enters OVDP (as opposed to the IRS Streamlined Program), they are acknowledging that they were willful and/or intended to evade tax.
Therefore, if you are a Legal Permanent Resident or other Visa holder, then there is the concern that if you want to apply for Legal Permanent Residence Status (“Green Card”) or U.S. Citizenship, when you are completing your N-400 form and it asks whether you have ever committed a crime, you would have to include the tax issues as a crime. Technically, willfully and/or knowingly not reporting your foreign accounts is a form of tax fraud and tax evasion.
Deportation or Removal
If you are applying for OVDP and you are granted admission into the program, chances are you will not be criminally prosecuted and therefore you would not be deported or removed if your Foreign Bank reports you. Moreover, once your OVDP application is complete and you are approved (and you submit the OVDP Closing letter) it may facilitate obtaining citizenship if that is the endgame you are seeking.
*If you are rejected for OVDP, it could lead to Deportation or Removal, but that is a fact-based analysis depending on the specific circumstances of your case.
My Spouse Does not Want to Enter OVDP
It does not take two to tango when it involves OVDP. The IRS is more than willing to accept a one person OVDP application. Even if your prior tax returns were submitted married filing jointly MFJ, it does not change the fact that one spouse (or one former spouse) has the ability to submit to the program even if the other spouse will not comply.
It is a much more complicated process, but if you happen to be married to a tax fraud then it is probably in your best interest to consider entering the program while making a dual application for Innocent Spouse as opposed to playing the wait-and-see game for two reasons:
- You never know when the IRS is going to strike – and that can have a major impact on your financial status; and
- You never know how sneaky your spouse, and especially a prior spouse may be – and the first person to go to the IRS usually gets the best deal (aka “first to squeal, gets the deal“)
We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
Again, the IRS does not care if you are no longer married and the prior spouse will not cooperate. If you want to go into the IRS and disclose these accounts then you have every right to do so.
If you were unaware of your spouse’s foreign assets during the marriage, and/or were unaware of the requirement to report the assets, and/or the money was not yours, then there are other options you may consider before making a full OVDP application.
**Before making any affirmative representation to the IRS you should consider speaking with an experienced OVDP Lawyer.
There is No Passive Income Tax in The Country with My Accounts
Unlike nearly every other country on the planet, the United States taxes US citizens, Legal Permanent Residents and Foreign Nationals Subject to U.S. Tax (Substantial Presence Test) on their worldwide income – despite where they are residing when the income is earned. Thus, merely because you may have your money in Singapore, Taiwan, Hong Kong or another country that does not tax interest income, it does not mean that the United States does not get their chance to tax your money.
The Unreported Money does not belong to me?
In many countries, it is not uncommon to have children listed on the financial accounts of the parents – even though the children ”really” have no right to the money. The United States understands this concept and therefore created a different program for non-willful individuals, which is called the Streamlined Program. Moreover, since none of the money belongs to you, you should be able to waive any penalty that would otherwise have been levied against you.
My Business Never Reported Foreign Accounts
Under U.S. law, as long as the business accounts meet certain threshold requirements (more than $10,000), you are required to report these accounts on your annual FBAR (Report of Foreign Bank and Financial Account Statements). It does not matter that the accounts are being held under business account name. If you are an owner of the business and have access to the money, then technically you are supposed to report these accounts to the United States.
My Business is Held as a Foreign Holding Corporation
The IRS knows all of your tricks. Whether your money is being held in a foreign corporation, a foreign holding Corporation, a British Virgin Islands company (BVI), a Cayman Islands company, a Maltese company – it does not matter. If the foreign financial institution where you hold the bank accounts has a US address or any information regarding the US owner on the account on file, chances are that under FATCA the financial institution is going to err on the side of caution and report the account.
The Business is not Under my Name
Depending on how sophisticated your foreign business and tax planning was, you may have foreign corporations that are not under your name, but to which you have signature or other authority over accounts at the bank – which are under the name of the business. Due to the global priority of promoting “financial transparency” in accordance with FATCA and CRS (Common Reporting Standards) there is an increased chance that the corporate veil will be lifted and you will be exposed.
I did not report my Foreign Retirement Account
You are required to report your foreign retirement account (some restrictions apply but with FBAR and FATCA it is better to not leave anything to chance). When it comes to foreign retirement accounts, it can get a little more tricky because if the retirement account was a US 401(k) then chances are you would receive deferred tax treatment. Thus, if you did not receive any benefits from the foreign retirement account (especially any withdrawals) then you may not have been willful by not reporting the account. This is because it is understandable to think you would not have to report a foreign retirement account until any distributions were made to you.
***You should speak with an experienced over OVDP lawyer on this issue
I received a FATCA Letter, What Should I do?
If you received a FATCA letter from your foreign bank, then you really need to take action. That is because the bank is waiting for you to reply to both confirm compliance with IRS tax law, as well as indicate whether you qualify for a W-9 or W-8 BEN.
If you are a US taxpayer then you will have to complete the W-9, which will make you and the bank subject to IRS tax reporting, And, if the bank or foreign financial institution sends the information to the IRS and they contact you before you have a chance to enter the program, the chances of you being subject the very stiff penalties skyrockets.
Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
Yes. At the current time, the IRS will not distinguish between the money you have in “Safe Banks” versus the money you have in identified facilitator banks “Bad Banks.” Therefore, if you have your money in one of these bad banks, then before entering OVDP it is important that you determine whether you were actually willful (50% penalty applies) for non-willful (50% penalty does not apply).
Stated another way, just because you have money in a bad bank does not mean your entire offshore balance subject to the 50% penalty unless you were willful. That is because a person could be non-willful and still have their money in one of these bad banks – that should not make them subject two of 50% penalty.
I Sold Foreign Property and Transferred Money into a Foreign Bank Account
The money that resulted from the sale will be included in the penalty calculation if after you sold the home and placed the funds into a foreign bank account of which you did not report the account.
Unreported Income from a Foreign Rental Property
If you have unreported foreign rental income from a home or property and you enter OVDP vs. the Streamlined Program, the value of the home is included in the penalty structure – subject to any mortgage that is due and owing on the home. The same rule does not apply to streamlined program applications.
I Opened and Closed Accounts Several Bank Accounts
The most important thing to keep in mind is that the same money is not counted twice. Thus, it is very important to make sure the duplicity of account money issue is properly vetted on the application so that the IRS is aware and understands the transfers.
I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
Yes. There are some people who may have submitted a “Quite Disclosure” because they were unaware of the whole OVDP process or though they could just amend the tax return late and file late FBAR statements.
What is GATCA/CRS?
CRS is the Common Reporting Standard, which is otherwise known as GATCA (Global Account Tax Compliance). The OECD has developed a new reporting standard in the shadow of FATCA to facilitate global tax compliance on an international scale. Therefore, chances are no matter how you set up your foreign accounts and in which country you are operating in — at some point or another one of the foreign financial institutions is going to report you.
What does “Under Examination” mean?
Leave it to the IRS to keep one of the most important aspects of qualifying for OVDP a nebulous uncertainty. Under examination generally means that you are in an audit or otherwise being questioned about your financial information by the IRS. To that end, depending on when you were contacted, how you were contacted, what information the auditor did or did not ask, the facts and circumstances surrounding your particular case – and other concepts that can make your head spin – you may still be able to enter the program depending on what stage of inquiry you received from the IRS.
Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
No. You only get one chance at this, so it is important that you really evaluate the facts and circumstances around your failure to report to determine whether you were willful or non-willful. While technically, there is no way to know whether you are willful – you just have to know.
By speaking with an experienced OVDP Lawyer you may be able to get a better idea of whether you were willful or non-willful.
Call Now, We Can Help.